Introduction: Climate Change Enterprise Risk management in context
This book is intended for all who want a comprehensive introduction on current and new enterprise risk management practices aimed at integrating climate change into the risk strategy of organizations. This main objective is to provide guidance to risk management professionals in supporting their organisations is the transition to a sustainable future through explaining a range of practical risk frameworks as well as tools and techniques.
The book provides examples and ‘best practice’ methodology for all organizations and geographies. It has been informed by consultation across different sectors as to their current practices and the reader will find that case studies and illustrative examples have been drawn from both public and private sector; primary, tertiary and consumer facing industries.
The book builds on the work undertaken by the Institute of Risk Management (IRM). It expands the work of the original guidance documents issued by the Climate Change Special Interest Group (SIG) which has, for example, identified key enablers that would require the most attention to facilitate the development and execution of a climate change risk management strategy.
The reader will find that many of the examples have been drawn from the financial services industry. This is only because the sector has been leading some of the main developments of risk practices in this field, mainly driven by regulatory pressures. We have used the learnings from those examples to apply to wider fields. For example, the categorisation of climate risks into Physical, Transition and Liability risk was initially developed by the Financial Stability Board but has been taken up widely and is accepted as the taxonomy to address these issues. These and other examples will equip the reader with models they can apply to their own specific context.
The book focuses on two foundational components of climate change risk management namely ‘resilience’, and ‘sustainability’. It provides insights into how to integrate climate change into an existing risk appetite and emerging risk management framework. It also explains some of the complexities in the design of stress and scenario tests through risk modelling tools and techniques. These are particularly important in the context of management and mitigation of climate change risks.
Vision and Philosophy
The management of climate risks includes both threats and opportunities. It is now perceived to be crucial to most organisations. The main purpose and vison of the book is to provide practical insights to enable the development and execution of a climate change risk management strategy in any organisation. Climate Change and wider Environmental, Social and Governance (ESG) issues will become the single most important business driver of the decade. Although it has been an emerging issue for many organisations there is currently little formal risk management guidance on this topic. This book aims to address that we hope it will provide insight and intelligence for all key stakeholders concerned with the challenge of climate change facing society:
Boards require assurance that significant risks have been identified and appropriate controls put in place. In order to ensure that correct business decisions are taken. Risk management activity is undertaken to provide structured information to assist business decision-making. Risk managers need to enhance existing practices to integrate climate risks so that boards can make those decisions in the context
of the most challenging issue facing society, climate change. Members of boards may find this book useful to identify and inform their climate change journey.
Regulators will increasingly impose Net Zero ambitions on their sectors and require the organisations operating within that sector to demonstrate a transition to a more sustainable low carbon economy through transparent disclosures.
Wider society is calling for organisations to embrace the Green Agenda creating the enhanced need for Environmental, Social and Governance goals or sustainability targets. This book should help engaged citizens to increase their understanding of the issues and provide constructive ways to increase pressure on any ‘errant’ organisation which needs to contribute more to a carbon free future.
The specific goals of climate risk management include:
Ensuring that there is a robust framework in place to identify and manage climate risks and opportunities
Ensuring that there is adequate visibility of risk management activities at the board level
Enabling strategic discussions to support the right risk / reward decisions
Integrating climate change into existing risk frameworks in order to become business as usual (BAU) .
One of the objectives of this book is to develop the use of consistent approaches and methodologies forclimate risk management. Its aim is to promote, within context, an established way of identifying, assessing and managing climate risks. The reader should be equipped after reading this to formalise the integration of these techniques within their existing ERM framework.
Book Structure and Key Features
The book focuses on existing risk management tools and techniques and explains how they can be tailored for managing climate change. For example, the reader will find discussions of how established techniques such as risk radars, ‘bow tie’ analysis, stress and scenario testing, risk maturity models, risk reporting dashboards etc. can be easily modified to encompass climate related issues. It also includes new risk management theory and concepts such as “stakeholder mapping” which are often perceived to be strategic management tools.
The book is presented in twelve chapters focussing on developing the integration of climate change into an existing
ERM framework to support decision making:
Chapter 1 sets the scene by outlining the main components and enablers that organizations need to develop and embed within their existing ERM framework and introduces the development of a climate risk taxonomy and a climate risk maturity model.
Chapter 2 builds on this to discuss the development of a Climate Risk strategy which will typically be a subset of corporate strategy. It also includes how organizations can achieve their strategic goals in a sustainable and climate friendly way.
Chapter 3 discusses how to build a strong and documented governance approach within organizations to help manage climate change risks.
Chapter 4 explores stakeholder expectations, particularly in the context of the Paris Agreement, and highlights the importance of stakeholder analysis and mapping as a key risk identification tool for organisations to utilise. This also includes discussion of a climate change risk radar as a key tool to enhance the resilience of organizations.
Chapter 5 covers “Transition risks” providing a global perspective on carbon emissions and mitigation strategies and what government and regulators are doing to meet their net zero targets.
Chapter 6 then delves into how organizations can build improved resilience from an operational, financial and strategic perspective due to the increased uncertainty of future weather patterns.
Chapter 7 provides an overview of climate risk data sources and how they are used to help organisations and businesses in climate related risk management. This chapter focuses on the opportunities and challenges linked to data and how the data and tools/models can be best used in a changing climate.
Chapter 8 examines global economic climate trends and consequences in detail in light of the fact that “climate action failure” has been identified by the World Economic Forum as the risk with potential to inflict the most damage at a global scale over the next decade.
Chapter 9 Provides examples of some of the main climate emerging trends across physical, transition and liability risks including legal cases that are important for organizations to consider in the context of climate change.
Chapter 10 Explains how organisations can assess the materiality of the climate risks and opportunities that they have identified through the use of stress and scenario analysis.
Chapter 11 aims to bring the previous topics together and discusses taking the methods discussed into a BAU context. This includes consideration of customer requirements, 3rd Party procurement processes, financial and investment planning.
Chapter 12 scrutinises how governments and regulators worldwide are introducing requirements for transparent disclosures. These will become mandatory soon in the UK and is expected to be the route many countries will follow.
In order to bring the subject to life and provide context to the ideas and concepts that are described, short illustrative examples are used throughout the text. In addition to these general examples, real-life situations and examples are also used, where a case study is helpful. It should be noted that whilst some reference to individual organization’s annual reports have been extracted in this book, the requirement for companies to disclose detail is changing so fast that the reader is encouraged to investigate topical reports on high profile companies to increase their understanding further.
Climate Change Risk Management in the Future
The world is facing an increasingly volatile and uncertain future; the pandemic, war in Ukraine and rapid changes in the way work is conducted have introduced change at an ever-faster pace. These pressures combine with the need for all of us, in whatever field, to contribute to a more sustainable future. The consequences of failure to adequately manage climate change risk will be disastrous and are potentially existential.
Whenever change occurs at a rapid pace there are increased risks. These may be seen as threats but for those with the foresight to implement risk management techniques in full they present a world of opportunity. The transition to a carbon neutral and sustainable future is full of opportunity.
Achieving those opportunities is a key feature of this book. By setting out an integrated approach to climate change risk management, this book provides a description of the fundamental components of successful management of the transition to a net zero future. It describes a wealth of risk management tools and techniques and provides information on successful delivery of an integrated and enterprise-wide approach to climate change risk management.