The Importance of Climate Risk Disclosure for Businesses
Climate risk disclosure occurs when companies voluntarily reveal environmental threats they might face. These statements provide specific information for companies on how climate risk might influence sustainability, output, or revenue. Depending on the industry, companies might identify how risks like climate change, rising sea levels, or temperature shifts will compromise operations.
Disclosing climate risks is becoming an increasingly important step in maintaining a successful organization. Investors want insight into how physical or transitional risks might influence a company’s bottom line. Vendors and suppliers need to understand how risks could slow logistics or create supply chain problems. Governments look to climate risk disclosure to ensure businesses implement new mandates in climate compliance.
Overall, everyone — no matter if they’re investors, customers, and executives — depends on climate risk disclosure for transparency into an organization's climate-related hurdles.
Climate Risk Disclosure Regulations
Recent years have seen an even greater consensus that climate change represents a global threat. To address these growing issues, governments and other regulating bodies have introduced new climate-specific standards and regulations for businesses.
The Task Force on Climate-Related Financial Disclosures (TCFD) represents one major contributing regulator. Formed by the International Financial Stability Board in 2015, the TCFD identifies specific climate-related risks that companies should disclose. They recommend that all climate risk disclosures fall under four key categories: metrics and targets, risk management, strategy, and governance.
Additionally, the European Union established its own taxonomy for sustainable activities. It outlines common channels that allow everyone — from private investors to public companies — to ethically disclose their environmental impact. The EU also proposed a Sustainable Finance Disclosure Regulation, to improve transparency surrounding sustainable investments.
In the U.S., the Securities and Exchange Commission (SEC) has proposed new regulations for climate risks a company must disclose. An SEC-sponsored climate and ESG Task Force was commissioned to further enforce transparency in climate risk disclosure, particularly for investors.
Assessing Climate-related Risks and Opportunities
Climate risk disclosure is an intentional process. It involves identifying, analyzing, and qualifying a range of climate-related risks — even if those risks don’t immediately threaten business success.
Here’s more on how that process works:
- Identification: Taking stock of all discernible climate risks and opportunities. Audit how climate-related factors might influence your facilities, supply chain, products, services, customers, employees, stakeholders, community, equipment, and intellectual property.
- Analysis: Exploring the total effects of climate-related risks and opportunities. Consider physical risks like natural disasters and transitional risks like policy changes. Get specific about how climate might affect financial performance, output, employee turnover, emissions, reputation, and resilience.
- Qualification: Grading the impact and severity of each climate risk or opportunity. Use models that forecast how climate risk and policy changes might influence financial scenarios and stakeholder return on investment.
Many companies use a Geographic Information System (GIS) as part of their suite of climate risk resources as well. This technology helps organizations of all sizes collect, store, secure, assess, and share data on location-based climate risks.
As a geospatial analytics tool, GIS helps overlay climate-related data on top of current business information. For example, it could provide insight into how rising sea levels or location-specific supply chain constraints might affect businesses in a specific region.
Benefits of Transparent Climate Risk Disclosure
All companies should maintain a transparent climate risk disclosure process — one that familiarizes investors, stakeholders, and internal employees with any climate risks on the horizon.
Here are a few benefits of a transparent climate risk disclosure process:
- Improved decision-making: Companies that disclose climate risks must first identify them. The climate risk identification process helps those companies make better, informed decisions about the future.
- Enhanced reputation: Investors prefer transparency. A transparent climate risk disclosure process helps investors accurately understand the risks and opportunities they face. This voluntary offering of information helps to improve your reputation in their eyes.
- Better access to capital: Investors willing to tolerate your climate risks are often more likely to invest. This helps your company access the capital it needs for research, production, marketing, or other operations.
- Compliance with regulations: Disclosing climate-related risks helps your organization maintain full compliance with governments and climate task forces.
As climate-related risks grow, businesses that prioritize climate risk disclosure are better positioned to thrive long-term.
Meeting Investor Expectations
Before contributing financially to a company, investors want to fully understand all possible risks and opportunities. As climate-related challenges grow in intensity and frequency, climate risk disclosures are increasingly important when convincing prospects to invest.
These disclosures help investors evaluate overall financial risk, particularly if your organization is subject to physical damage from climate change. Climate disclosure also helps investors understand how well your company accommodates current regulations.
Within a climate risk disclosure, you must also discuss opportunities your company can take advantage despite or even because of climate-related concerns. Shareholders want investment opportunities where dividends increase over time. Without sufficient disclosure, your company could see a reallocation of funding toward companies with more climate transparency.
Building Climate Resilience Through Disclosure
Many experts agree the best approach to climate change is a proactive one. This is the response climate risk disclosure creates. Disclosing climate risks helps companies identify threats early, implementing solutions before problems worsen.
Most businesses share common concerns: reduce costs and improve efficiency. Companies can realize each of these goals through climate risk disclosure. This allows organizations to eliminate risks before the price to fix them grows. Avoiding smaller-scale risks also means companies won’t see risks grow to harm efficiency in major ways.
Integrating Climate Risk Disclosure into Business Strategy
Including climate risk disclosure in your business strategy isn’t always easy. However, it’s an important step in informing investors and protecting your business against sustainability threats.
Setting realistic goals is one way to more comfortably handle climate risk disclosure alongside other business priorities. This means identifying and monitoring key performance indicators (KPIs) that honestly translate into business success. Your KPIs should also identify how well your organization has identified and implemented a climate risk disclosure process.
You can also fortify your business strategy with the right climate risk intelligence. You can do this with your team by collecting and reviewing any new information on emerging climate risks. Evaluating risk intelligence is an important step in maintaining a comprehensive risk management strategy.
Challenges and Barriers to Climate Risk Disclosure
Your organization will face obstacles when handling climate risk disclosure. Without a dedicated team to handle climate reporting, the disclosure process might get lost along with other priorities. Team members might also disagree on the level of climate risk your company faces.
Here are some other barriers to effective climate risk disclosure:
- Lack of measurement tools: Without assessment tools, some companies are unable to properly identify — and disclose — climate risks.
- Lack of bandwidth: Employees might face competing priorities when finding time to identify climate risks. Short-staffed teams might also face challenges balancing climate analysis tasks with current responsibilities.
- Lack of internal expertise: Employees might need education or training in different climate risk identification techniques.
- Uncertainty about future trends: Without an accurate performance forecast, companies might not have insight into how climate risks might affect operations.
Some organizations face challenges in disclosing risks simply because they don’t have visibility into the risks they face — that’s why many companies use risk analytics software to identify hidden insights in the data they collect.
Including climate risk disclosure in your business strategy isn’t always easy. However, it’s an important step in informing investors and protecting your business against sustainability threats.
How Climate Risk Disclosure Will Evolve in the Future
Climate risk is expected to evolve alongside climate change. Task forces will introduce new climate regulations and recommended best practices. Investors will expect new disclosures on prevalent climate-related risks.
Evolutions in risk management technology can help companies handle all of these changes. Look for a risk management information system that helps handle every stage of the risk audit process — from data collection to reporting. With the right risk management solution, your organization can spend less time gathering climate data and more time acting on it.
