The Financial Risks of Climate Change: Assessing and Reporting
Good governance is about appropriately managing risk. But when it comes to climate change, many Canadian companies are unaware of their financial risk exposure. Insurance companies have been aware of the financial effects of climate change for quite some time due to the increasing amount of claims they have paid out over the years due to climate change and damage to property.
Every business can have financial climate change risks associated with its operations. A group of experts has come together for one reason: to provide free1 advice to Canadian boards about climate change and managing their risk profiles.
Canadian Climate Governance Experts Program
The Canadian Climate Governance Experts Program is helmed by Dr. Janis Sarra of the University of British Columbia and Professor Cynthia Williams of York University. It will operate for two years from its launch date of September 3, 2019. The program is a project of the Canada Climate Law Initiative, which is also helmed by Dr. Sarra and Dr. Williams. There are 45 experts available across Canada which include company executives, governance experts, lawyers and accountants.
The Reason for Assessing Your Climate Change Risk
The Bank of Canada announced in its 2019 Financial System Review that it will begin undertaking a multi-year research assessment and plan. Once this plan is complete, it will integrate climate change risk into its financial stability analysis working with domestic and international partners. This may mean that companies operating in the Canadian financial sector will eventually require ongoing climate change risk assessments by the Bank of Canada.
Other climate change risk news for Canadian financial sector businesses includes a recent publication by the Canadian Securities Administrators (CSA), Reporting of Climate Change Risks. This guideline document is meant to walk board members and management through the formation of a climate risk reporting .
The reasons for the document, according to the CSA, include heightened individual and institutional investor interest, room for improvement in quality of disclosure, and an increase globally in climate change disclosure. A failure to keep up with Canada’s global counterparts could make Canadian companies less competitive.
The document recommends that boards should take the following measures:
- Strategic Plan Development
A strategic planning process that results in a clear plan which outlines risk and opportunities presented by climate change should take place at the board level.
- Climate Change Risk Oversight
The board should have a written mandate in which it accepts responsibility for climate change risk identification and making sure appropriate business processes exist to mitigate that risk.
- Review by Audit Committee of Disclosure
The audit committee must thoroughly review the climate change risk disclosure, as well as any other measures that have been put in place to mitigate climate change risk.
The document also outlines duties for management apart from the board which include implementing business systems for risk management and owning the preparation of the climate change disclosure.
Developing a Climate Change Risk Assessment Framework
The CSA publication urges companies to classify climate change risks according to immediate threat level and if they will occur in the short or long term. It also offers a classification of each type of climate change risk. There are physical risks, which are obvious , for example damage to property, other company assets, or the organization’s supply chain. There are also transition risks, such as reputational damage by not being seen as a champion of low-carbon technology. These risks are more tangential than physical risks but no less real. The risk framework your business develops will be highly customized according to the sector you are in, assets, and many other factors.
Businesses Not in the Financial Sector Can Benefit from Climate Change Risk Assessment
Even if your company operates outside of the financial sector, you can benefit from knowing your climate change risk. If, for example, some of your real estate assets are on a floodplain, you should be aware of this fact and include it in your climate change risk assessment.
Additionally, if your manufacturing company relies on resources that are from a coastal area threatened by climate change, you should be aware of the risk and have backup suppliers in place. If you know many of your clients are concerned about the environment, you should have a climate change plan in effect to avoid reputational and brand damage.
Given the limited time frame that the Canadian Climate Governance Experts Program is available, interested boards should probably book their presentation as soon as possible. More information on how to book a session is available here.
Footnotes-*With the exception of travel costs for program experts who do not live in the region where you want them to do the presentation.