“Climate change poses financial risks to a range of investments — from food and farming, to infrastructure, construction and insurance liability,” Mary Creagh, chair of the UK Parliamentary Environment Audit Committee, said in a statement published with the group’s report Greening Finance: embedding sustainability in financial decision making
According to the report published on the 4th June, Britain should force large companies, pension funds and other big investors to report their exposure to climate risks by 2022 at the latest, the cross-party group of MPs said.
The report said companies should examine and disclose how climate change could impact their businesses in the future, such as increased exposure to extreme weather events for insurance companies and the impact of physical disruptions to supply chains for companies in the agriculture sector.
“The low-carbon transition also presents exciting opportunities in clean energy, transport and tech that could benefit U.K. businesses,” said Creagh.
The report also says: “The government should make climate risk reporting mandatory on a ‘comply or explain’ basis by 2022.”
Russell Group has read the report in detail, with a particular focus on the Scenario Analysis section of the report [Article 67], which states”
“To understand the potential risks and opportunities that climate change poses to an organisation it is necessary to analyse a range of possible scenarios—modelling possible temperature rises and the market, social and regulatory response. The Task Force for Climate-related Financial Disclosures (TCFD) recommended that organisations incorporate scenario analysis into their strategic planning process:
“The disclosure of organizations’ forward-looking assessments of climate-related issues is important for investors and other stakeholders in understanding how vulnerable individual organizations are to transition and physical risks and how such vulnerabilities are or would be addressed. As a result, the Task Force believes that organisations should use scenario analysis to assess potential business, strategic, and financial implications of climate-related risks and opportunities and disclose those, as appropriate, in their annual financial filings.”
Alex White from the Aldersgate Group who contributed to the report described feedback they had received that some companies ‘did not know where to start’ with scenario analysis:
‘ … in the conversations we have had so far with corporates who are looking at implementing TCFDs in their own company practice, there is still a lot of uncertainty as to how that will look for them. One of the very positive recommendations in the TCFDs is the forward-looking scenario analysis. Where carbon foot printing looks backwards, this looks at the forward risks, which is very useful to both the company and the investor, but now lots of companies are saying, “What scenarios do we choose? You say a 2-degrees scenario but what does that look like? What does that world look like? What timeline should we be working with? How do we do this?” I think there needs to be a great deal of guidance from Government.’
Aviva said that Government should work with regulators and the Committee on Climate Change ‘to develop a set of standard base scenarios for companies to draw on so that investors can be confident that the analysis is consistent, comparable and robust’
As Russell Group has reported in previous blogs, Climate Change when fused with Connected Risk creates a new deadly world of risk. For in this new world, contagion from a small event is not just confined to local networks. Rather, it creates a ‘butterfly effect’ and unleashes a cascade of further events through the network, impacting numerous corporations along the way.
The failure of a corporate to deal with climate change could have a disproportionate effect on the company itself, its supplier and partner organisations and the entire industry. It’s a real concern for all CEOs who may be aware of the urgency of Connected Risk, yet are unsure how to proceed.
The lessons for insurers and corporate risk managers advising the boardroom is simple: adopt an integrated risk management and modelling framework that quantifies bottom-up exposure, manages risks and in so doing delivers superior return on equity. Only, then will large organisations be able to steer through the rough and stormy seas of Connected Risk.