Who is leading the climate conversation in your organization? The sustainability team? Leaders in the finance or environment, social and governance (ESG) functions? Or perhaps general counsel and investor relations are at the forefront?
Arguably, a race is on between business functions over which should own the climate change agenda, and in this insight, we argue risk managers should and can lead the pack by demonstrating both how climate is a matter of quantifiable risk, and an arena for opportunity.
Because they deal with risk day-in, day-out, risk professionals may not fully grasp how pertinent their skills set is to climate conversations, and how comparatively uncomfortable many other business areas are when dealing with notions of risk and uncertainty.
Climate amplifies existing risks even before we consider the spectrum of climate-related risks, which includes the immediate physical risks arising from weather-related events and slow onset climatic changes, as well as transition risks.
Physical risks may be acute, such as the risk in the change in frequency and/or severity of weather events like flooding, typhoons and wildfires. Chronic physical risks, meanwhile, include rising sea levels or temperatures.
Transition risks relate to those risks associated with moving to a low-carbon economy. They include changes in policy and regulation required to bring about the low-carbon transition, technology and market changes. They also include potential climate change litigation concerning individuals, corporates, and directors and officers for alleged negligence around incomplete climate risk disclosures or allegedly inadequate transition plans. For example, environmental lawyers ClientEarth have moved to take legal action against the directors of Shell over the company's climate transition plans which it claims represent a failure to adequately prepare for the global shift to a low-carbon economy, and therefore constitute an alleged breach of directors' duties under the U.K. Companies Act.1
Let’s also not forget the sentimental and reputational risks at play. If your organization’s activity is thought to be detrimental to transition, your customers may lose confidence. Allegations of greenwashing, meanwhile, may well be played out in the media and dent sales.
If climate is a risk issue, then the risk manager must step up in understanding and managing it; they are the professionals with the expertise to transform the wide range of climate-related risks some colleagues may deem intimidating and unknowable into the fungible, the measurable and that able to be packaged.
Risk managers are uniquely well-placed to be the challengers for climate leadership; best able to understand the downside risks, as well as communicate the opportunities to senior management. Crucially, we are the people who understand the currency of climate change is quantified risk, not simply carbon emissions.
So, it’s time to learn more about specific climate-related risks, using analytics to build nuanced and dynamic understandings of physical and transition climate risk across operations and supply chains, putting your organization in a stronger position to optimize its overall risk strategy.
While some teams and board members may potentially feel overwhelmed by the climate challenge, to risk professionals, climate may be viewed more simply as an extension of other risks such as natural catastrophe risks they are long accustomed to addressing.
Risk professionals are already successfully combining climate science, mathematics and data to build models and metrics to assess the range of climate-related risks. And unlike, for example, investor relations, sustainability, or general counsel colleagues, they’re comfortable with uncertainty and ranges of outcomes, used to working in ever-shifting risk landscapes and navigating routes through these to greater certainty and growth.
For these reasons, we might argue climate change is the problem risk professionals can and must help solve.
If your organization is the early stages of developing a climate strategy (and, in our experience, a great many are) this represents an opportunity to introduce ‘risk management 101’, identifying, assessing and managing risks drawing on traditional Enterprise Risk Management approaches.
If your organization is looking to evolve its approach, the risk manager’s role may be more focused on engaging stakeholders in other business units, seeking their data and also their buy-in on the strategic importance of viewing climate through the prism of risk, working in tandem to set goals and KPIs.
In this way, risk managers can lead the charge that makes climate action feel more doable to the board, presenting it as just another factor to add to those they have been modelling for decades, and using data the business already has on things like property locations.
Risk managers can also reassure senior management this process is iterative – the business does not need every answer on managing every risk immediately (though with the risk professional’s help, they will start to ask all the right questions).
The Task Force on Climate-related Financial Disclosures (TCFD) obliges certain companies to improve and increase reporting of climate-related financial risks to investors, lenders, and investors, with recommendations focused on governance, strategy, risk management, and metrics and targets.2 As of April 2022, TCFD-aligned disclosures have become mandatory for companies across the U.K. economy, in a move expected to impact more than 1,300 of the largest U.K. registered companies and financial institutions.3
Meanwhile, earlier this year, the Securities and Exchange Commission proposed rule changes that would require organizations to include certain climate-related disclosures in their registration statements and periodic reports. This would include information about climate-related risks “reasonably likely” to have a material impact on their business, results of operations, or financial condition, as well as certain climate-related financial statement metrics, and disclosures on greenhouse gas emissions.4
TCFD and other disclosure regimes are clearly the domain of the risk manager, a space where they can lead improved disclosure with a view to effectively evaluating climate-related risks and opportunities to which the company is exposed. Risk leadership of the business’ climate-related disclosures response can support better-informed strategic decisions on where and when to allocate capital, and overall improved assessments of risks and exposures over the short, medium, and long term.
Risk managers should work to align the risk management strategy with TCFD. Even if you’re operating in a territory where TCFD isn’t mandatory, our current experience suggests that even where regulators aren’t asking for compliance, many investors will.
By collaborating with colleagues, risk managers can use TCFD obligations to embed climate into organizational strategy, and to go beyond compliance to identify the strategic opportunities.
Organizations we’re working with tell us TCFD has thrown up a lot of interesting risk-based discussions. The role of risk managers now is to weave analytics into these discussions, leading deep dives into the data to allow for optimization and answering questions on how this work fits with Enterprise Risk Management: What does the business do now to manage our risk in the optimum way? What does it need to stop doing?
Climate disclosure regimes means businesses need ready answers on their physical and transition risk exposures, the corporate strategy in response to these, and the quantifiable evidence informing these decisions.
Which other business area other than risk is better placed to get these answers and re-frame how they negotiate with capital and insurance markets?
Risk managers should ensure their organizations are talking to markets the right way in the light of climate-related risk, working to understand what insurers need to know about the organisation’ ESG strategy to optimize risk financing.
Risk managers can call on the combination of hard and soft skills they may have already developed to both turn climate science into capital allocation models and navigate any organizational silos they need to work across to get the data and insight needed.
We believe there is both a strong argument for risk professionals to be the stewards of transition and a professional and moral imperative they ensure this continues to happen.
This is not only in terms of leading the internal conversation but also in working collaboratively and with insurance markets to support risks, including emerging technologies, being insurable throughout transition.
We hope WTW is acting as something of an example here, with our work incubating Climate Transition Pathways, an accreditation framework that provides insurance companies and financial institutions with a consistent approach to identifying which organizations have robust transition plans aligned to the Paris Agreement5, and supports their role as stewards in the transition to a low-carbon economy.
The onus is now on risk managers to step up to the climate risk challenge, to both position their organizations in light of insurers’ deepening scrutiny of climate risk and to get ahead on the answers to tomorrow’s climate risk-related questions.
Part of this will be leading workstreams with external stakeholders to create the insurance solutions we’ll need for the new economy, in the process, redefining the value of risk professionals to wider society.
What will you do to own the climate conversation and make your contribution to transition and our sustainable global future?
If you need support leading the climate conversation or quantifying the risks for your organization, get in touch.
1 https://www.reuters.com/business/sustainable-business/shell-directors-may-face-lawsuit-over-climate-transition-plans-2022-03-15/
2 https://www.fsb-tcfd.org/
3 https://www.gov.uk/government/news/uk-to-enshrine-mandatory-climate-disclosures-for-largest-companies-in-law
4 https://www.sec.gov/news/press-release/2022-46
5 https://www.un.org/en/climatechange/paris-agreement
