Stormy times for risk management
- Extreme weather events
- Natural disasters
- Failure to tackle the causes and consequences of climate change
These three environmental risks are directly linked to climate change. They are also among the nine global risks that are deemed most likely to occur and to have the most significant impact. This is according to the Global Risk Report 2018, a report mapping global risks published by the World Economic Forum (WEF).
Three types of risk
Companies and banks are also subject to these risks. Three risk groups have been defined for the economy, reflecting the classifications of the Task Force on Climate-Related Financial Disclosures (TCFD). On behalf of the Financial Stability Board (FSB), this task force studied climate risks for the financial market and the economy and developed recommendations for a future corporate climate reporting process.
- These include the direct effects of climate change
- Direct physical risks: acute events (storms and heavy rainfall) and chronic changes (rising sea levels). The consequences of such risks for the economy range from storm damage to buildings, to temporary interruptions to global supply chains, to the loss of sites in coastal areas
Direct physical risks: acute events (storms and heavy rainfall) and chronic changes (rising sea levels). The consequences of such risks for the economy range from storm damage to buildings, to temporary interruptions to global supply chains, to the loss of sites in coastal areas
- Indirect physical risks: for example losses in energy production due to cooling water shortages caused by sustained periods of drought
- These risks primarily arise as a result of political measures to decarbonise the economy. The introduction of a CO2 tax, for example, or measures to expand or tighten up emission trading rules,
- could have a huge impact on the business models of entire sectors (such as coal mining) or the use of certain technologies (such as combustion engines)
- Changes in consumer behaviour (such as paying more attention to energy consumption when purchasing electrical appliances) also fall into this risk category
- These risks require extensive investment in new technologies, energy-efficient production processes and climate-compatible products
- These risks may arise when those affected by climate change demand compensation for the damage from the major polluters
- For example, the claim filed in 2017 by a Peruvian farmer in a German court, against the company RWE
There is controversy surrounding the issue of whether institutional investors should be considered in breach of their trust-held duties if they fail to take adequate account of climate risks in their capital investment decisions. The EU Commission’s “Action plan on financing sustainable growth” includes plans to table a legislative proposal in 2018. This process is to clarify the responsibilities of institutional investors and asset managers with regard to issues surrounding sustainability and climate.
Disclosure of climate risks
To enable customers, business partners, investors, credit providers and other stakeholders to build up a picture of the climate risks linked to specific companies, the Task Force on Climate-Related Financial Disclosures (TCFD) recommends that companies should, in the future, provide this relevant information. This is to focus, in particular, on the following action areas:
- Governance: Taking climate-related risks and opportunities into account when managing the company
- Strategy: The effects of climate-related risks and opportunities on the operations, strategy and financial planning of the company
- Risk management: Information on how the company identifies, assesses and controls climate-related risks
- Measures and objectives: Targets and performance indicators that are monitored or collected to assess and control climate-related risks and opportunities
Currently, these action areas are still recommendations that have not (yet) been incorporated into the relevant legal requirements.