Climate Risk Governance

“The warnings about global warming have been extremely clear for a long time. We are facing a global climate crisis. It is deepening. We are entering a period of consequences.” Al Gore.

For decades, the world has been developing a more matured view of the impacts that the progress has caused to our climate. We all have been exposed to a growing amount of information about the climate that helped us to navigate through Maslow’s learning stages of “unconscious incompetence” to “conscious incompetence”, but now we seem to struggle to move to the next stage of “conscious competence” regarding the climate agenda and in the meantime, the climate crisis intensifies.

After this intro, I could easily expand this article to inspire activism and drive action to address the issue at hand. However, my intention here is to invite you to reflect on a small piece of this puzzle which relates to the role companies play to support or reduce the damage to the climate, specifically the journey to set up an effective climate risk governance.

Financial risks from climate change: Climate change is a multifaceted topic for many time-pressured executives to manage and the responsibility model has been evolving substantially in the last years. However, there are opportunities to develop it further.

Before talking about the governance model, it’s worth covering the two primary types of climate-related financial risks:

• Physical risks are the inevitable consequences of changing weather conditions and they can emerge as specific events such as hurricanes, floods, wildfires and storms, or they can be a result of longer-term shifts in the climate such as droughts, sea level rise, global temperature rise, and change in precipitation patterns. These in turn, could damage or disrupt the company's operations and supply chain posing a direct threat to its resilience.

• Transitional risks are the potential secondary consequences of changing weather conditions caused by regulation, market transformation, or changing public sentiment. Unlike physical risks, transitional impacts can emerge from adjustments relating to tightening of energy efficiency standards, renewable technology and electric vehicles, to name a few.

According to the Chartered Governance Institute (CGI), governance is a system that provides a framework for managing organisations. It identifies who can make decisions, who has the authority to act and who is accountable for how an organisation perform. The framework implemented by a company to manage the risks and opportunities derived from climate change constitutes their ‘climate risk governance’, including the related processes and guidelines.

"The climate agenda needs to reach - and be directed by - the Board, and the management of financial risks from climate change reflected within the company’s risk management framework to ensure visibility, accountability, and traction."

Whilst institutions can cover climate under a ring-fenced programme to ensure resource and focus is preserved, others may prefer to position it under a far wider ESG structure or even to embed it as part of the enterprise risk function. Any of these options will result in different board-level accountability and needs to be considered within the specific jurisdiction (e.g. Senior Managers Regime in the UK). Regardless of the chosen model, the climate agenda needs to reach - and be directed by - the Board, and the management of financial risks from climate change reflected within the company’s risk management framework to ensure visibility, accountability, and traction.

Since the Task Force on Climate-related Financial Disclosures (TCFD) recognized climate change as a threat to the financial system stability, an effective climate governance became fundamental to ensure a company can assess the risks and opportunities and take appropriate actions. In order to manage such risks, a company must address it through the risk management framework by reflecting the financial risks from climate change within their board-approved risk appetite.

Consequently, the board of directors play a crucial role for setting the tone at the top whilst ensuring the business is appropriately equipped, from a resources, processes, and data perspective, to mitigate the risks and explore the opportunities created by the climate change. Besides the role of the board, wouldn’t it be great to see the whole company (and society) living and breathing the climate agenda? Personally, I feel we are in the right path but we definitely need to increase the pace until we achieve “unconscious competence”.