Climate Change: Risk and Disclosure

Following our recent Net-Zero blog, we are continuing to support our network with advice relating to carbon disclosure and environmental risks to business. Ivan Bates, who sits within the Board Practice and leads on Climate Change within Eton Bridge Partners, has established a wide network of climate change experts, who are well positioned to support our client base.

Measurement and disclosure of carbon emissions is, in many respects, a simpler undertaking than the more complex issue of climate change-related disclosure of threats to businesses. In this article, we will discuss both these elements.

Government policy, asset ownership pressure, and consumer opinion are all levers of change, requiring businesses across the economic landscape to adapt and embrace a range of measures to meet net-zero targets. The trend towards climate related awareness and transparency began more than 30 years ago, but for businesses, the last 10 years has seen significant change. Pressure from central banks and other supervisory authorities led to the establishment of the Task Force on Climate-related Financial Disclosures (TCFD) in 2015, and by 2025, large listed and private companies will be required to disclose threats to their business from climate change. The trajectory that business will be required to undertake is therefore clear. What is less clear is how businesses are equipped to deal with the profound changes that are beginning to take effect.

Carbon Disclosure and Reduction

Irrespective of the motivation, the decision to measure is the start of a journey that will build over time to incorporate corporate strategy, governance and performance. The act of measurement, in its widest sense, highlights the cost of emissions generation, quantifies the scale of reduction efforts required, and supports the wider strategic view of a company. It will need to decide how well placed it is to address existing and forward risks from tax, policy, supply chain, consumer demand and the type of products and services it offers.

The measurement of carbon emissions often provides a start point for wider ESG considerations and has the advantage of national and global standards of methodology, and accounting that are still developing in the wider analysis of ESG credentials and progress towards Sustainable Development Goals.

Measurement of carbon emissions by in-house or external organisations is a defined process, often containing the following distinct phases:

  1. Data collection and analysis.
  2. Reporting of data through emissions reports and subsequent workshops.
  3. Automation of emissions impacts.
  4. Supply chain analysis. Note – supply chain impact assessments that sit outside the current reporting threshold provide a wider perspective of carbon emissions and, whilst optional, will enable future government policy disclosure amendments to be more rapidly incorporated.

Once initial emissions data has been captured and a process of future data capture established, this provides a benchmark against which emissions reduction can be assessed and businesses held accountable. Meeting carbon reduction targets presents a positive opportunity for businesses to demonstrate their ESG credentials and bolster brand image.

Measurement provides a quantification of impact that enables the next key step, of reduction of impact, through increased operational efficiency, use of renewables, low carbon procurement, carbon budgeting and a range of activities that sit closely alongside the operations of businesses. Reduction over offset will remain the key hallmark of responsible companies and this is linked closely to disclosure of measurement and achievement.

Climate Change Risk Analysis

The UK government will be going further than the measures recommended by the TCFD, and is the first G20 country to mandate climate disclosures by 2025. New disclosure rules will apply to listed commercial companies, UK registered large private companies, banks, building societies, insurance companies, UK-authorised asset managers, life insurers, and pension schemes. It is therefore set to change the reporting landscape across the whole economy, including smaller companies downstream from the large institutions.

So how will businesses measure risk, where are the disruptive forces, and what do boardrooms need to do? Physical risk from rising temperatures, sea levels, and acute weather events present an immediate transitional risk, whilst future risk models for 30-50 years hence will be more acute and uncertain. The effects on margins, demand, and supply chains will need to be considered at all levels from portfolio summary, company level, through to individual physical asset level.

In order to support disclosure, the climate risk modelling industry is growing, with models currently able to analyse a range of impacts such as predicted energy transition trends, power usage, transport, carbon pricing, material and physical disruption, and company valuations. In parallel, within its Climate Financial Risk Forum guide, the UK government has set out its governance and strategy policy for business, with a requirement for firms to disclose where primary responsibility sits at board level, the frequency that boards discuss climate related issue (including climate risk training), how boards integrate climate-related financial issues into strategy-setting, and how boards oversee progress against climate-related metrics and targets. Therefore, companies will need to address skills gaps, identify boardroom responsibilities, and ensure the metrics are in place to provide full and transparent disclosure of threats to businesses.

Conclusion

Disclosing an impact and then stating an aim for say, Carbon Zero status 20 years from now, is a sign of intent but not action. Disclosure is the start of a process, but not the basis for acclaim, increasingly it is a hygiene factor. Investors, consumers and employees are keen to see demonstrable action, milestones and a plan that is embedded into a business. This will build rapidly in the current climate and creates potential brand risks for companies.

To avoid risks and to future proof strategy, boards will need to fully embed carbon and wider ESG impact analysis at the board level. The soon to be implemented recommendations of disclosing climate related risks and accompanying governance frameworks to manage them, is a useful guide to how boards and companies will need to function. Avoiding a bolt on approach driven by the demands of corporate communications will be vital for successful companies over the next two decades.