Guest Post: The Role of Climate Risk Planning
By: Louie Woodall, Editorial Lead at Manifest Climate
Climate change is an existential risk to businesses. Extreme weather events and long-term climatic changes threaten to degrade organizations’ physical assets and disrupt their supply chains. Meanwhile, public and private efforts to slow global warming through decarbonization and shifts in consumption could undermine certain business models and transform the flow of goods and services around the world.
Organizations without a suitable climate plan are in danger of being left behind as the economy reacts to these trends. Furthermore, if they fail to dovetail their climate plans with their existing risk management processes, they may develop blind spots that render them vulnerable to climate hazards and cause them to miss opportunities.
Few organizations say they are integrating climate risk in this way. In its latest status report, the Task Force on Climate-related Financial Disclosures (TCFD) found that almost two-thirds of organizations do not report how climate risks are integrated into their overall risk management.
This is where Climate Risk Planning (CRP) comes in. Put simply, CRP is a structured approach to understand, manage, and communicate an organization’s climate-related financial risks and opportunities. The objective of CRP is to optimally position a company for a climate-adjusted future, one in which the regulatory, policy, and economic landscape looks very different than it does today.
For CRP to be effective, it cannot be siloed away from an organization’s existing risk management and business strategy processes. Instead, it has to permeate through all aspects of an organization. After all, no organization can meet the vast challenges that climate change poses unless every business line and employee is properly prepared.
CRP may vary somewhat from organization to organization to reflect differences in business models and internal structure. However, every CRP process should be built around the following three pillars:
Quality data is the foundation of an effective climate risk plan. If an organization is unclear on its current level of climate preparedness, it’s unlikely to know how to improve it over time. This is why a CRP process should start with an organization identifying its climate risks and opportunities, as well as the actions it has taken to address them.
Some organizations may be able to build this data inventory using their current risk management processes. Others may have to develop internal capabilities or draw on external resources to complete the exercise. What’s important is that the risks, opportunities, and actions are clearly defined and mapped to an organization’s financial drivers — like revenues and capital expenditures. This will allow the CRP process to be properly integrated into an organization’s financial planning.
An organization’s climate plan has to make sense in the narrow context of its own business model, resources, and ambitions. But it also has to align with the broader context of emerging climate-related regulation and disclosure guidance. An organization that fails to account for existing and upcoming rules and requirements when drafting its climate risk plan is likely to draw the ire of regulators. If its plan and accompanying processes do not meet external standards, it may also have to spend time and money implementing parallel climate reporting practices to satisfy these provisions.
This is why it’s essential that an organization’s CRP process considers the broad array of climate-related regulations and standards it’s subject to, or could be, in the future. For example, a UK-based asset manager may want to consider how its climate plan aligns with the Financial Conduct Authority’s proposed anti-greenwashing regulations, as well as mandatory TCFD disclosure rules that are already in effect.
To better understand the ambition and sophistication of their climate plans, organizations have to benchmark their climate risk plans against peers and industry leaders. This is critical for two reasons. First, it allows organizations to individually identify gaps in their climate risk plans and focus on areas of improvement. Second, it enables organizations to collectively cohere around best practices and level up their climate risk plans.
This step in the CRP process requires organizations to track and monitor their peers’ climate actions and disclosures systematically and consistently.
CRP is a fast-evolving field, and many organizations have yet to get to grips with the concept — let alone put a CRP process in place. Starting with the above three pillars should put organizations on the right path. Once an entity has identified its climate risks and opportunities, assessed its plan’s alignment with climate-related rules and regulations, and benchmarked its climate plan to others, it should be well-positioned to take effective climate actions and get ready for a climate-adjusted future.
About Manifest Climate:
Manifest Climate is the leading Climate Risk Planning solution provider. We embed intelligence to guide organizations to understand, manage, and communicate their climate-related financial risks and opportunities. Our proprietary software and in-house climate experts help businesses build internal climate competence, better align their disclosures with global reporting frameworks, and stay on top of market developments and peer actions. Get in touch with our team here.