A focus on processes and policies to manage climate-related risks

Our sustainability webinar series aims to break the complex world of sustainability into digestible pieces to help you understand the fundamentals and start driving change in your organisation.

Building on last month’s article, ‘Assessing climate-related risks and opportunities’, Aletta Boshoff and Kevin Frohbus explored the essential processes and policies for managing these risks in our September 2024 webinar.

Recap of what are climate-related risks?

Climate-related risks stemming from the multifaceted impacts of climate change are categorised into physical and transition risks. Physical risks include acute events like storms and floods, as well as chronic changes such as rising sea levels. Transition risks involve the shift towards a low-carbon economy, encompassing policy changes, technological advancements, market shifts, and reputational impacts. Understanding and managing these risks is crucial for maintaining resilience and sustainability.

Climate risk policies and processes

Effective climate risk management should be integrated into an existing entity’s risk management framework. Identifying climate risks for mandatory reporting is only effective when it aligns with the broader business risk management processes. Climate risks are inherently business risks driven by climate factors and should not be addressed in isolation.

Once climate risks are identified and included in your risk register and a framework for mandatory reporting is established, the next step is to integrate these risks into your overall risk management strategy. This involves applying general risk management theory and processes to ensure that climate risks are managed effectively alongside other business risks.

Identify and prioritise adaptation actions

As you prepare for mandatory reporting, it’s important to start developing adaptation strategies to mitigate the likelihood and consequences of priority climate risks. To build an adaptation plan, you need to understand current control measures and climate risk management, identify gaps, devise actions to address these gaps and assign responsibilities to risk owners.

At this stage in the risk management process, it is assumed you have moved beyond merely identifying climate risks and have evaluated their magnitude and likelihood, identified material risks, and implemented initial control measures. Now, your focus should shift to addressing the residual risks. This involves creating specific adaptation strategies to manage these remaining climate-related risks effectively.

Types of adaptation actions

Adaptation actions may range from incremental to transformational and may include simple improvements to an organisation's adaptive capacity, to major infrastructure projects that require significant lead time for planning and design. NSW Government's climate risk ready guide identifies commonly used categories of adaptation actions which includes:

• No/low regrets of win/win options are low-risk responses that deliver economic benefits and should be implemented as a priority
• Accommodate the risk by including provisions that reduce the consequence of impacts
• Retreat, for example by relocating assets and people to safe areas
• Defend existing and new structures against climate change affected hazards using largely structural measures
• Co-exist or adapt through a combination of innovative measures including planning.

Develop and implement an adaptation plan

Once you have identified climate risks, addressing them is a strategic choice. By proactively developing these strategies, you can better prepare for the challenges of climate change and ensure your reporting is comprehensive and tested.

Scenario analysis helps predict future states and aids in strategic planning by identifying residual risks. As an adaptation action, it involves understanding potential pathways and planning your journey before setting out.

This figure below can help you develop a plan to address your climate risks using five approaches: ‘no regrets,’ ‘accommodate,’ ‘retreat,’ ‘defend,’ and ‘co-exist.’ Adaptation pathways include management trigger points along a time and risk continuum.

Source: Climate Risk Ready NSW Guide (reproduced and adapted from Jacobs et al 2018 and Haasnoot et al. 2013)

Monitoring and reviewing your adaptation plan

To ensure the effectiveness of your adaptation plan, it’s crucial to update and review your findings. This includes:

1. Data collection and assurance: Annually calculate Scope 1, 2, and 3 emissions, assign responsibility for data collection, and decide on the appropriate software platforms. Ensure robust processes and controls for data quality and integrity and identify who will perform the assurance.
2. Integration and reporting: Integrate climate risk metrics into your decision-making processes. Regularly monitor and review these metrics, ensuring they flow through the organisation to the chief decision-maker and up to the Board and Audit Risk Committee.
3. Continuous improvement: Establish an incident register to track and address any failures in data governance and target metrics. This will allow for continuous improvement of your processes and ensure that your reporting remains accurate and reliable.

Conclusion

It is essential that key metrics linked to material climate risk in your risk register are included in the information to your organisation’s chief decision maker - the same individual responsible for segment reporting in financial contexts. If this critical information is not reaching your chief decision-maker, it indicates a significant weakness in your data reporting and flow systems.

To effectively manage climate risks, two main actions are necessary when it comes to developing sufficient processes:

1. Integrate these risks into your governance and risk management frameworks through robust adaptation strategies.
2. Ensure that the relevant metrics and data evaluating the performance of these strategies are accurately and comprehensively calculated and reported to the appropriate authorities within your organisation.

By doing so, you can ensure that your organisation is not only prepared for mandatory reporting but also resilient to climate-related challenges.

How BDO can help

The sustainability reporting landscape is developing rapidly, making it challenging for organisations to keep up and know where to start in preparing for mandatory reporting. If you need help developing your plans, contact us.