Report: 9 in 10 European businesses not properly preparing for climate risks
A survey of more than 700 chief audit executives has revealed that just over one in ten (12%) believe their organisation is making sufficient efforts to measure, reduce and adapt to climate risks.
The survey was conducted by the Chartered Institute of Internal Auditors (Chartered IIA) and the results have been published today (21 September) as part of the organisation’s annual ‘Risk in Focus’ report.
Climate change and other environment-related risks have been steadily climbing the list of risk priorities in recent years, the report reveals. It was ranked in the top five risks by just 14% of professionals in the 2020 edition of the report, published in 2019. That proportion rose to 22% last year and 31% this year. No other risk area saw year-on-year increases in prioritisation this steep.
Nonetheless, that leaves 69% of audit chiefs not viewing climate risk as a top-five risk. The Chartered IIA’s definition covers physical risk, such as flooding; transition risk, such as stranded assets or increased costs from altered legislation, and potential reputational risk.
Moreover, just 12% of the survey respondents agreed that they, their teams and their organisations are prioritising spending significant time and effort preparing for the climate crisis. As well as professionals working in the private sector, those working in NGOs and the public sector were also polled.
Risks that were ranked as more pressing than climate were cybersecurity and data security; changes in laws and regulations; digital disruption; human capital, diversity and talent management; business continuity, crisis management and disasters, and financial, liquidity and insolvency risks.
The Chartered IIA has called this gap between awareness and action on climate risk “alarming” and stated that “organisations can no longer ignore the climate change and sustainability agenda”.
The report states: “Those that do not take immediate action face the genuine risk of extinction. As long-term stewards of capital, institutional investors are pulling out of companies that are not prioritising the environment or society and failing to make the necessary adjustments to their strategies, business models and operations.”
Readers of the report are urged to understand that the climate crisis poses an existential threat to businesses and is a systemic, “forever risk”. Chartered IIA recommends that businesses go beyond add-on strategies to ensure that climate action is central to every organisation’s mission, values and strategy, and that all goals are aligned with climate science and with the UN’s Sustainable Development Goals (SDGs).
The Institute is also calling on businesses to match pledges with investment in projects that will future-proof products and services, including considering changes to the business model. Moreover, it is urging readers to consider political and regulation-related climate risks.
“Climate change is extremely high on the Government’s agenda, particularly with COP26 coming up, and business has a critical part to play,” said Barclays’ audit committee chair Mike Ashley, one of the respondents to the survey.
“At a minimum, companies should record and publish their activities related to climate risk and sustainability, using internationally recognised standards such as the Task Force on Climate-Related Financial Disclosures (TCFD), and internal auditors have an important role to play in providing assurance on these performance metrics and that they are embedded in how the business actually operates.
“Fundamentally, we need to ensure that high-level sustainability announcements by businesses are actually lived up to, so I think there is work that internal audit can do in that space to ensure that we do walk the talk.”
Resilience: Rising up the agenda?
The science is becoming clearer; the sixth report from the IPCC’s Working Group 1 last month confirmed that, even if the world gets on track for net-zero emissions by 2050, it will take decades to reverse global temperature increases. Other changes, including altered weather patterns, would “continue for decades to millennia”. Put simply, businesses and nations will need to ramp up adaptation plans as well as setting ambitious decarbonisation targets if humanity is to avoid the worst impacts of the climate crisis.
Businesses in the UK had already received this warning through the Climate Change Committee’s (CCC) latest assessment of climate risk two months prior. That report revealed that the cost of physical damage to could triple by 2050 without further action.