Uncertainties could lead into significant shifts, necessitating proper strategies
Risk Management News
The evolving landscape of climate transition planning is increasingly central to the global shift towards a low-greenhouse gas and climate-resilient economy, a new WTW report details. This change is not only driven by growing regulatory demands for businesses to disclose their net-zero roadmaps but also presents a unique business opportunity.
Transition planning is now an integral aspect of business strategy, addressing the risks and opportunities arising from the global progression towards a low-carbon future, and organisations and their risks managers are encouraged to adopt a more dynamic approach in understanding their transition risks, allowing for a clearer comprehension of the interplay between risks and their cause and effect.
Businesses face various uncertainties in their journey to net-zero transition, including policy, legal, and market changes. These could lead to significant shifts in asset values and cash flows or increased operational costs. Strategies to manage the impact of climate change on businesses include purchasing insurance, exploring alternative risk transfer options, divesting from high-emitting assets, or shifting business models to lower carbon footprints and greenhouse gas emissions.
Integrating climate risk quantification
The initial step in this process involves quantifying climate risks that could diminish business value. By employing modelling and analytical tools, organisations can integrate climate risk quantification into their business and financial planning. This approach helps in embedding transition planning into business strategies, delivering expected returns while managing climate risks, and meeting the evolving climate reporting obligations.
Regulatory momentum for robust transition plans and climate risk quantification has been growing. In 2023, the International Sustainability Standards Board (ISSB) finalised its International Financial Reporting Standards (IFRS) with the publication of Standard 1 Sustainability-related Disclosure Standard and Standard 2 Climate-related Disclosure Standards (IFRS S1 and S2). Notably, IFRS S2 includes provisions for disclosing transition plans.
Furthermore, the Corporate Sustainability Reporting Directive (CSRD) in the EU mandates that all listed and large companies disclose a transition plan aligned with a 1.5 degrees Celsius global warming scenario in their annual reports. In the US, the Securities Exchange Commission climate proposal requires organisations to disclose transition plans if they form part of their climate-related risk management strategy.
The year also saw the release of the Transition Plan Taskforce Disclosure Framework, a UK-based initiative designed to aid organisations in developing comprehensive transition plans in line with IFRS S2 requirements. This framework aligns with the transition plan guidance developed by the Glasgow Finance Alliance for Net Zero, supporting the international convergence around defining robust and credible transition plans.
Moving beyond carbon in quantifying transition risks involves considering metrics beyond just emissions. Emissions-based metrics, while seemingly objective and easy for external stakeholders to verify, may not fully encompass an organisation’s exposure to transition risks.
A 2023 joint report from WTW and the Institution of International Finance points out the limitations of GHG emissions as a sole indicator. These emissions metrics often suffer from reporting biases, are backward-looking, and might not accurately reflect a firm’s profitability affected by increased emissions costs, including potential carbon taxes.
Moreover, the report underscores a low correlation between financial risk and carbon intensity, suggesting that a comprehensive transition plan should incorporate a broader range of metrics and considerations.
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