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Men in Suits

The Importance of Climate Risk Planning

Climate change poses an existential threat to companies. Extreme weather events and long-term climate changes affect the physical assets and supply systems of enterprises. In the meantime, public and private efforts to halt global warming through decarbonization and consumer adjustments could threaten some economic models and alter the worldwide flow of commodities and services.



Organizations without an appropriate climate plan risk falling behind as the economy reacts to these shifts. In addition, if they do not integrate their climate plans with their existing risk management systems, they may develop blind spots that make them susceptible to climate-related risks and cause them to miss out on opportunities.


Few organisations claim to include climate risk in this manner. In its most recent status report, the Task Force on Climate-related Financial Disclosures (TCFD) revealed that over two-thirds of companies do not disclose how climate risks are incorporated into their overall risk management.


Climate Risk Planning (CRP) comes into play here. CRP is a structured way to understand, manage, and communicate the climate-related financial risks and opportunities of an enterprise. The purpose of CRP is to ideally position a corporation for a climate-adjusted future, in which the regulatory, policy, and economic landscape will be much different than it is today.


Effective CRP requires integration with an organization's existing risk management and business planning procedures. Rather, it must infiltrate every area of a business. Ultimately, no firm can face the immense difficulties posed by climate change unless each business line and person is adequately equipped.


CRP may vary somewhat amongst organisations due to variances in business models and internal organisation. However, any CRP process should be based on the three pillars listed below:




Identify The Climate Risk


The core of an effective climate risk plan is high-quality data. If a company is unsure of its current climate preparation level, it is unlikely to know how to enhance it over time. A CRP approach should therefore begin with a business identifying its climate risks and opportunities, as well as the steps it has taken to mitigate them.


Using their present risk management practises, some firms might be able to compile this data inventory. Others may be required to create internal capabilities or utilise external resources to achieve the task. Risks, opportunities, and actions must be clearly identified and related to the organization's financial drivers, such as revenues and capital expenditures. This will enable the CRP process to be appropriately integrated into the financial planning of an organisation.


Assess the current standards


The climate plan of an organisation must make sense in the context of its own business model, resources, and goals. However, it must also conform to the larger context of emerging climate-related regulations and disclosure recommendations. When designing its climate risk plan, a company that disregards existing and future regulations and standards is likely to incur the ire of regulators. If its plan and related processes do not meet external standards, it may be required to develop parallel climate reporting practises in order to comply with these provisions.


Consequently, it is crucial that a company's CRP process takes into account the vast array of climate-related legislation and standards to which it is already subject or may be subject in the future. A UK-based asset manager, for instance, may want to assess how its climate plan works with the Financial Conduct Authority's proposed anti-greenwashing legislation and the already-in-place statutory TCFD disclosure rules.





Consider a Benchmark


To better understand the ambition and complexity of their climate plans, firms must compare their climate risk management strategies against those of their peers and industry leaders. This is crucial for two reasons. First, it enables firms to individually identify climate risk plan gaps and concentrate on improvement areas. Second, it permits organisations to converge on best practises and elevate their climate risk plans.


This part of the CRP process requires organisations to regularly and consistently track and monitor their peers' climate activities and disclosures.


Conclusion


CRP is a rapidly expanding topic, and many organisations have not even grasped the concept, let alone implemented a CRP process. The aforementioned three pillars should set organisations on the proper road. After identifying its climate risks and opportunities, assessing its plan's alignment with climate-related rules and regulations, and benchmarking its climate plan against others, an entity should be well-positioned to take effective climate measures and prepare for a climate-adjusted future.


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