Climate risk analysis: A crucial component of due diligence
Climate risk analysis: A crucial component of due diligence
Increasingly, investors, shareholders and financial service providers are integrating climate-related considerations which can significantly affect financial performance into their investment decisions.
This shift is driven by proposed mandatory climate-related financial reporting requirements in Australia and globally. Additionally, capital flows globally are aware of the risks and opportunities presented by changing climatic conditions and the shifting market and regulatory context as we transition to a zero-carbon economy.
Our climate-related risk analysis has helped clients identify potential revenue erosion and additional operating expenditures affecting overall valuations before they occur and designed controls to mitigate the risks to financial performance.
Evaluating these risks and opportunities is essential for comprehensive due diligence. Just as you would evaluate other risks as part of your financial due diligence, we can assist with the analysis of climate-related financial risks as part of your due diligence process.
What is climate risk due diligence?
Climate risk due diligence goes beyond traditional due diligence by offering a thorough assessment of material climate-related risks, liabilities, and opportunities. It also goes beyond assessing asset vulnerability to changes in climatic conditions by delving into potential changes in business operating conditions. Our robust approach helps identify and propose responses to potential physical and transitional risks that may materially impact the financial performance of your investment.
Why is climate risk due diligence important?
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Investor confidence |
Access to capital increasingly depends on sustainability performance, making climate risk due diligence essential for securing funding. |
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Risk mitigation |
It helps mitigate key risks such as reputational, regulatory, financial, and strategic risks. |
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Competitive advantage |
Provides a competitive edge by enhancing market share, customer retention and investor interest. |
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Sustainability goals |
Supports achieving sustainability goals and gaining recognition from industry, new and potential customers, and shareholders. |
Key steps for conducting a climate risk due diligence may include:
- Conduct initial research and stakeholder engagement: Perform desktop research and engage internal stakeholders to gather preliminary information on climate risks and opportunities. Understand the operating context for the company.
- Data collection: Collect relevant information from the company to be used in the assessment and analysis of climate-related risks and opportunities.
- Identify and assess risks: Establish inherent risks, evaluate current controls, if any, to determine residual risks, and create a comprehensive prioritised risk inventory.
- Quantify financial implications: Where appropriate, use scenario analysis or other methods to quantify the potential financial impacts of climate-related risks and opportunities.
- Reporting: The deliverable is a written report based on the analysis of the company, clearly outlining the methodology, observations and findings, which may also include recommendations for future treatment.
Partner with BDO for climate risk analysis and mitigation
Our national team of sustainability experts is dedicated to assisting organisations understand and manage the importance of climate risk analysis as part of their due diligence. BDO offers the guidance and assurance you need.
Contact us to help you navigate the complexities of climate risk and turn challenges into opportunities for sustainable growth.