- Step 1: Identify the relevant reporting mechanisms for your company
- Step 2: Gather the information required for climate reporting
- Step 3: Report in line with key standards and regulations
- Step 4: Get assurance for your climate reporting
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Identify, prioritize and quantify your company’s climate-related financial risks and opportunities
Identifying your climate-related risks and opportunities is a crucial first step in gathering the information required for climate reporting
You will be familiar with the need to understand, manage, and disclose risks to your company, like political or economic risks. Investors look to your annual reports and other corporate documents to understand the future trajectory of your company and the potential impact of these identified risks.
The need for greater transparency on business exposure to climate-related risks and opportunities was a challenge taken up by the Taskforce on Climate-related Financial Disclosure (TCFD) in 2015. Increasing numbers of businesses are disclosing their climate risks and opportunities in line with the framework set out by the TCFD, which has now been incorporated into the two new standards from the International Sustainability Standards Board. The eleven TCFD recommendations continue to form the basis of best practice climate-related risk and opportunity assessments worldwide (see box below).
Climate-related risks and opportunities fall into two main categories:
Physical risks: Exposure to the physical impacts of climate change that could, for instance, present risks to your supply chain or open a new way of doing business
Transition risks: Exposure to regulatory, litigation, or technological risks and opportunities from the Net Zero transition, which could potentially occur in a non-linear or disorderly way
The four core elements of TCFD-aligned climate-related financial disclosures
The TCFD recommendations set out eleven recommended disclosures around four core areas for your business to report material climate-related information to the market via your mainstream financial report. They have now been fully incorporated into the ISSB Standards, IFRS S1 and S2, and ISSB will be fully responsible for TCFD monitoring.
1. Describe the board’s oversight of climate-related risks and opportunities
2. Describe the management’s role in assessing and managing climate-related risks and opportunities
3. Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term
4. Describe the impact of climate-related risks and opportunities on the organisation’s business, strategy and financial planning
5. Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2 degrees or lower scenario
6. Describe the organisation’s process for identifying and assessing climate-related risks
7. Describe the organisation’s processes for managing climate-related risks
8. Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management
Metrics and Targets
9. Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process
10. Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas emissions and the related risks
11. Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets
To prepare for disclosure, you need to identify which climate-related risks, opportunities, and impacts are material for your company. This will require an assessment of the interplay between three dimensions affecting your company:
External risk drivers: Including physical risks resulting from exposure to the physical impacts of climate change and transition risks resulting from exposure to changes in policy, regulation, litigation, technology, or consumer behaviour shifts that arise from transitioning to a Net Zero economy
Business value chain stages: You should identify and quantify where climate-related risks and opportunities occur in areas like raw material sourcing, production, transport and distribution, sales, and end of life. This allows you to define appropriate strategies to manage risks across your vale chain
Climate scenarios: You should test your exposure to risks under different climate scenarios. These scenarios model possible future states of the world under different conditions and assumptions, like the likelihood and impact of a 1.5°C or 2°C increase in global warming. Conducting scenario analyses helps you identify which strategies and actions will be most effective to ensure the resilience of your company
Figure 3: Three dimensions of climate-related risks and opportunities.
To begin the process of identifying the specific risks and opportunities your company faces, their potential financial impact under different climate scenarios, and how your company can anticipate or manage those financial impacts, you should create a longlist.
Create a longlist
You should begin by creating a longlist or register of your company’s climate risks and opportunities. To create this longlist, you should:
Gather internal data such as annual reports, financial data, strategy documents, and risk management methodologies. This will help you understand risk management frameworks and processes, and gather the necessary financial data required for prioritization later
Identify external risk drivers through desk research, such as reviewing industry reports or policy documents, which will help you understand the potential physical and transition risks your company could be exposed to
Identify internal value drivers by conducting workshops and interviews internally to understand how particular risks could impact your company in particular
Prioritize the most important actions
Once you have compiled your longlist of risks and opportunities, you should assess how they would impact your company under a range of different climate scenarios. This will involve modelling the impact of climate scenarios such as a Paris Agreement-aligned reduction in global emissions, the likely outcome of current policies and trends, and the likely outcome of a failure to act on reducing global emissions.
Quantify the expected financial impact
You should quantify the expected financial impact of a shortlist of prioritized risks and opportunities to identify which risks or opportunities present the most significant potential impact to your company’s financial performance. The first step is to collate relevant financial data from your company, including current financial data (most recent year of actuals or forecast), procurement data, and taking relevant data from your annual report and Scope 3 footprint. A breakdown of costs and revenues of the company aligned to the business model structure developed in the risk screening stage and split across key geographies will help inform the quantification.