ESG Climate Related Risk Consultancy

Climate change is accelerating, ESG regulations are rapidly evolving with a sharpened focus and investor interest is intensifying

"Climate Change is Accelerating, Bringing World ‘Dangerously Close’ to Irreversible Change"

New York Times

Was the headline in a recent New York Times article first published in December 2019 and updated in January 2021. The headline captures the urgency, the criticality and the potential irreversibility of our climate change situation.

What Are Climate Risks?

ESG Risk Analysis
Climate-related financial risks or climate risks, are the financial risks linked to climate change. Climate risks can affect balance sheets and lead to losses through standard channels such as diminished asset valuations or increased loan defaults.

Growing numbers of governments are converging on a goal of net-zero emissions by 2050, in line the Paris Agreement of 2015 to keep the average global temperature rise “well below 2°C above pre-industrial levels” and to “pursuing efforts” to limit the rise to 1.5°C (UNFCCC, 2015).  

The concept of ‘climate risk’ has stemmed largely from a combination of financial regulators and private sector institutions. An example is the Task Force on Climate-related Financial Disclosures (TCFD), which has been particularly influential. Looking at climate through a risk lens can help us understand how climate risks transmit into the real and financial economies impacting companies, countries and households and the financial institutions that lend to and invest in them and how different sectors are differentially affected.

Climate risk has two broad categories: physical risk and transition risk. Physical risks arise from the physical climate (and weather) impacts that result from the changing climate. Physical risks are subdivided into acute and chronic risks or hazards. Transition risks arise from the economic transformation needed to drastically reduce, and eventually eliminate, net greenhouse-gas emissions and reach net-zero emissions. These are outlined in the following tables.

TypeExamples
AcuteIncreased frequency and severity of extreme weather events (e.g. wildfires, cyclones, hurricanes, floods)
Chronic

Increased and extreme changes in weather patterns

Temperature increases

Sea level rises

TypeExamples
Policy & Legal

Introduction of a carbon tax (pricing of GHG emissions)

Increased emissions reporting requirements

Increased regulation of existing products or services requirements

Increased permitting restrictions

Exposure to legal claims

Technology

Cost to transition to lower emissions technology

Failure of new technology and resultant loss of investment

Product substitution for lower emissions products (and therefore reduced demand for existing products)

Market

Increased cost of raw materials

Increased costs due to supply chain changes or disruption

Changing customer behavior

Reputation

Changes in consumer perception or preferences

Stigmatization of sector (e.g. extractive sector)

Increased stakeholder concernNegative external feedback (e.g. social media, press)

According to the Organisation for Economic Co-operation and Development (OECD), with no further mitigation actions, global temperature rises of 1.5-4°C may lower global real GDP by 1.0-3.3% by 2060 and by 2-10% by 2100. Even at the lower end of estimates, this represents trillions of dollars.

Global temperatures are rising and are now at their highest since records began. The 20 warmest years on record have been in the past 22 years. Much of the increased global temperatures have been absorbed by the oceans where we see rising ocean-surface temperatures which have led to an increased frequency and intensity of extreme weather events.

Manifestations of this include: 

  • In 2020, wildfires, hurricanes and other natural disasters cost more than $250 Billion of losses globally, more than thirty percent higher than in 2019.
  • Six of the ten costliest events were in the USA and were largely attributable to unusually warm ocean surface temperatures.
  • The ice melt in Greenland and in the Antarctic has and will continue to cause sea levels to rise.
  • Wildfires are more prevalent and wildfire seasons are months longer.

The Taskforce on Climate-Related Financial Disclosure (TCFD) was established in 2015 by the Financial Stability Board (FSB), a body established by the G20, The TCFD was charged with developing a set of voluntary, consistent disclosure recommendations that companies could use to provide information about their climate-related financial risks. TCFD is a robust framework for organizations to use in helping them disclose their climate-related risks. This information that organizations disclose is designed to focus on the aspects of climate change that are material for financial stakeholders.

The TCFD does not impose any specific methodology regarding how to address climate risk. To quote the TCFD Technical Guide “An investor’s climate policies and practices cannot therefore be said to be ‘compliant’ or ‘in line’ with TCFD recommendations. Rather, an investor can report on its progress in implementing a climate-related policy in line with the TCFD’s recommended disclosure.

Climate risks are:

  • Transverse in nature and therefore cannot typically be easily labelled as one of the traditional risk categories such as market risk, operational risk or liquidity risk.
  • Increasing in frequency and intensity
  • Nonlinear in nature

Unlike in traditional risk models, we do not have historical information on which to build robust forecasting and predictive models for climate risk.  Accordingly, we typically develop a range of scenarios to provide some range of assessments of potential outcomes.

Climate risk assessment can involve a range of multiple disciplines from science to economics to financial analysis and regulation.  It typically inspires passionate political debate and social movements, and raises just as many political, social, and moral questions as it does economic and financial ones. 

“Climate change: can the insurance industry afford the rising flood risk? Floods were once considered too irregular to insure against. But global warming has changed the calculation.”

Financial Times, February 2020

Contact one of our experts today to discuss how we can prepare your organisation for

We provide a range of TCFD Readiness Assessments

There are a number of ways in which we can help you manage your climate related risks.

We typically recommend an initial Readiness Assessment for your organization. This assessment provides you with a very quick but thorough analysis of your organizational readiness to manage your climate related risks. We have these assessments for Financial Services and non-Financial Services. For non-Financial Services, we have assessments for carbon sensitive industries and non-carbon sensitive industries.

Our Approach

We have a very efficient and straightforward process that involves the following key steps

b

Consultation

Consultation with the client.

b

Online readiness assessment

Client completes an online readiness assessment

Report

Client receives Readiness Assessment Questionnaire Report within 48 hours of completion of the online readiness assessment.

Roadmap

Client develops their tailored roadmap which will help to manage the delivery of the Climate Risk program at the client organization.

b

Execute

Our consultants can be available to help you develop the roadmap.

We provide these tailored assessments across a range of sub-sectors:

  • Asset Management
  • Bank
  • Credit Union
  • Insurance 
  • Private Equity
Our financial services assessments specifically look at whether your organization has any business arrangements or interests in (including holdings in, investments in, contracts with, or loans to) carbon sensitive industries. We undertake this analysis to determine your organizational exposure to Transition and/or Physical Risks.

Carbon-sensitive industries: these include industries such as: 

CoalMetals & Mining
Oil & GasChemicals
Electric UtilitiesConstruction & Materials
Air-freightAutomobiles & Components
Air transportationAgriculture
Maritime transportationBeverages
Rail transportationPackaged Foods & Meats
Trucking servicesPaper & Forest Products
Real Estate Management & Development

Operating in one of these sectors or having a business arrangement or interest in a carbon-sensitive industry  increases the possibility of your organization being exposed to Transition and/or Physical Risks

Non-carbon-sensitive industries where there is a reduced possibility of your organization being exposed to Transition and/or Physical Risks

“In 2008, only one societal risk, pandemics, was reported in the top five risks in terms of impact. In 2020, ALL Top 5 Global Risks in terms of Likelihood are environmental”

World Economic Forum, 2020

The relentless rise of carbon dioxide has resulted in:

  • 2020 seeing the highest level of GHG concentration for 800,000 years (more than 425 ppm (parts per million)).
  • 2020 being the hottest year on record.
  • The 20 warmest years on record have been in the past 22 years, with the top four in the past four years, according to the World Meteorological Organization (WMO).

Our collective global carbon footprint has resulted in current estimates showing that we are way off target. This sentiment was echoed by Antonio Gutteres, UN Secretary General in February 2021, when he acknowledged that while good progress has been made over the past year, it is not enough.

Carbon Dioxide Emission Long Term Trend
“The world remains way off target in staying within the 1.5-degree limit of the Paris Agreement,” Mr. Guterres told ambassadors.  “This is why we need more ambition, more ambition on mitigation, ambition on adaptation and ambition on finance.”  Describing 2021 as “a crucial year in the fight against climate change”, the Secretary-General looked to Member States to build on this momentum on the road to Glasgow.  He said the global coalition to make net zero emissions a reality, needs to grow, to cover more than 90 per cent of all carbon entering the atmosphere, underscoring a UN priority. 

ESG Regulations Are Rapidly Evolving with a Sharpened Focus

Global regulatory trends highlight the accelerated adoption of ESG-related regulations targeting institutional investors and other financial institutions.

The Principles for Responsible Investment (PRI) highlights 700+ regulatory revisions in the world’s 50 largest economies requiring long-term value considerations, including ESG factors (October 2020).

Regulatory revisions are accelerating and gaining focus:

  • PRI identified that 97% of policy changes have been introduced in the last 20 years.
  • In 2018, more ESG regulatory reforms were introduced globally than in the previous six years, 80% of which targeted institutional investors.

ESG Risk Guard is ready to support you.

Contact us to benefit from expertise, insights and knowledge into the ESG risks that can impact your organisation and be better positioned to address and manage these risks risks within an organization.

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