Working with their insurers, risk managers can make climate-related disclosure a relatively painless process, according to Amar Rahman and Belinda Bates of Zurich Climate Change Resilience
Businesses are increasingly having to assess and disclose climate change-related risks, as well as their mitigation activities. Stakeholders want to understand the impact a business has on the environment and what the organisation is doing to reduce greenhouse gas emissions and mitigate the worst effects of climate change.
There are now a number of established voluntary frameworks to facilitate climate change-related disclosure, such as the Task Force on Climate-Related Financial Disclosures (TCFD), while a growing number of compulsory regimes are in development or under consideration.
In October, the UK announced it will make it compulsory for large companies to disclose their climate-related risks and opportunities, in line with TCFD recommendations. It follows similar moves by Switzerland, Japan, New Zealand and Australia, while the US Securities and Exchange Commission is currently working on its own climate change disclosure rules.
Reducing risk through transparency
Climate-related disclosure will eventually become a requirement for doing business, with transparency demanded by investors, banks, insurers, supply chain partners and customers alike. It would, however, be a mistake to view climate change disclosure only as a compliance or box-ticking exercise. Frameworks like the TCFD can form the foundation for an organisation’s climate change strategy, informing decision making, raising awareness and giving rise to solutions.
Disclosure frameworks also have clear relevance for risk management. Frameworks like the TCFD require organisations to identify and assess climate change-related risk, and demonstrate actions taken to mitigate and monitor them. Transparency on climate change-related risks and actions should, therefore, help to manage risks in the medium and long terms.
Risk data and perception
If they have not already, most large companies are now in the process of creating sustainability reporting functions to facilitate climate change-related disclosure under the TCFD, or similar frameworks. However, very few companies have the required expertise and capabilities inhouse, and most do not even know where to begin.
For most organisations, the biggest challenge is likely to be data: where to find it and how to incorporate it into risk management scenarios. Few organisations will have access to all the necessary data and tools – such as climate data – and neither will they have the methodology to integrate it with strategic tools, models and climate change scenarios.
From working with clients, we have seen how easy it is for organisations to get lost in the detail of the process, which cuts across business units and involves complex risk concepts and climate science. For example, taxonomy is not as straightforward as it may seem, as concepts such as ‘criticality to operations’ will need to be clearly defined, as well as basic concepts, such as ‘risk’ itself. The meaning (and perception) of physical, reputational, operational, and other types of risks varies across an organisation (and across geographies for those organisations with a global footprint). Assessing the accuracy and confidence levels of modelled output can also be challenging, given the uncertainties of climate science.
Risk or opportunity?
Much of the process of climate change-related reporting is essentially a risk management exercise, and risk managers can play a key role in establishing and running the process. In their central cross-divisional role, risk managers are well positioned within their organisations, with a good overview of the value chain and understanding of criticalities.
One of the challenges of climate change reporting is to make the risk tangible and to communicate risks in a way people can understand – a core competency of risk managers. Many effects of climate change and global efforts to reduce emissions of greenhouse gasses are difficult to predict, while concepts like the probability and severity of future extreme events can be hard to grasp.
Risk managers can also leverage their relationships with the insurance community, which is increasingly developing solutions to help customers adapt to climate change and manage the transition to more sustainable business models. Companies can tap into the expertise and capabilities of insurers like Zurich that have a long history of assessing natural hazard risks and working with clients to build resilience and develop solutions.
Help is at hand
While reporting frameworks and regulatory requirements differ, they all require businesses to establish a formal process to collect and analyse data, to identify and quantify critical risks, and to develop and demonstrate the likely impact of mitigating actions. This will be new for most companies. But while it might initially appear a daunting task, with the right help, establishing a climate change reporting process need not be complicated.
Much of the data needed to report the physical risks of climate change already exists, both within organisations and with third parties. For example, insurers hold much of the data and tools required for the TCFD process, such as natural catastrophe claims history, insureds’ exposure data, and how that exposure will evolve under various climate scenarios.
Zurich’s Climate Change Resilience Services (CCRS), part of Zurich Resilience Services, proposition has been supporting a growing number of organisations with their TCFD reporting. CCRS can work with companies to formulate their response to TCFD, develop a roadmap and provide a methodology, data and modelling tools to assess climate change risks, as well as drilling down and developing solutions tailored to the sites identified as high risk.
Step by step
Climate change-related disclosure is set to expand rapidly in coming years and will increasingly be driven by regulatory requirements, as well as an increasing sense of social responsibility in large organisations. Building a process to assess and report climate change risks and opportunities is an iterative process, and the sooner companies start, the better. By starting with the data that is easily accessible, organisations can prepare for mandatory frameworks, as well as kick-start the process of developing climate change solutions.
Contributed by Belinda Bates, climate data and analytics expert within Zurich’s Climate Change Resilience Services, and Amar Rahman, principal risk engineer and global head of Climate Change Resilience Services at Zurich