Five key insights into climate risk for board members

As the impacts of climate change continue to be felt globally and the physical risks increase, so too do the complex challenges and decisions that board members face. Physical risk is impacting financial stability, investment allocations, and insurance costs – executives in the financial sector and beyond can no longer ignore these risks. At our recent webinar, financial market and climate risk experts spoke about the critical need for strong governance of climate risk, not only to ensure the resilience of the financial sector but also to progress the global effort to mitigate climate impacts.

Here are five takeaways from our recent webinar on climate risk for boards following on from our research report into this topic:

2050 has been cemented in the minds of boards and sustainability professionals as a key date by which the globe needs to reach net zero greenhouse gas emissions to remain consistent with 1.5C. But climate change is a clear and present risk which is already impacting companies worldwide; and the impact is a financial one. Board members need to take a robust view of climate risk, not just because of regulatory pressure but also because of the real bottom line risks. Lenders and insurers are already factoring climate change into prices, so those organizations who are most aware of climate risk could be higher on the priority list for debt financing or insurance than others.

“If climate inaction and climate change continue, you have to just assume that whatever risk you have today will just increase over time” Gillian Mollod, senior manager, research and development, ICE

There’s an important distinction between regulation mandating risk disclosure and regulation mandating risk management; up until recently, the greatest impact on businesses is regulation around risk disclosure. The TCFD (Task Force on Climate-related Financial Disclosures), which is now part of the regulatory framework in many jurisdictions, was initially meant to be a voluntary initiative to assist investors and corporates in sharing a common language and framework to measure, assess, and communicate climate-related financial risks. A more nascent area of climate risk management is climate stress-testing. Whether voluntary or regulatory, these exercises are helping organizations to develop the capabilities to gather and assess climate risk information and use it for strategic business decision making and risk management.

“if all we think about with regulation is the tick the box exercise of preparing a report, either we’ve missed the mark, or the regulations have.” Andrew Eil, climate risk and investment consultant

Financial actors including pension funds, banks and asset managers have been concerned about climate change for some time now – at least since 2001 when the Institutional Investors Group on Climate Change was founded. Since then, the engagement on climate in financial markets has increased greatly. Initially asset owners and executives used general climate information like heat maps to get a rough idea of the climate risk exposure to their portfolio or business. Climate risk 2.0 is moving from general risk identification to robust and rigorous quantification that is specific enough geographically and temporally to make business decisions. The next question for executives and investors is whether that data can be translated into financial information that is actionable.

In the last few years we’ve moved from little usable data to assess physical risks to much more data of a better quality, with details on how to assess it. The next step is what to do with that data – Beyond measuring and disclosing. The opposite of a risk is an opportunity, and with better data investors can see opportunities such as better financing options, higher valuations and potentially more stable returns – especially if you’re invested in many physical assets with complex global supply chains. However, more case studies are needed on the adaptation opportunity for global investors.

Finally, the idea that there is a lack of reliable data is partially a misconception; there is also a lack of understanding of how to properly use climate data. This is mainly because climate metrics are developed by the scientific community but used by financial professionals, and there is little cross-pollination between the two groups. There needs to be a concerted effort from the scientific community to educate and share their knowledge of how climate change will impact the financial world. But financial institutions need to be clear about what action on climate change is within their capability, and how they can use the best data to make better investment decisions. Companies, on the other hand, even with the best data available might not be able to change investor decisions should they view the company as more prone to climate risk.

“The quality and precision of physical risk data has improved considerably over the past few years. I think what we need next is the further buildout of a financial ecosystem which appreciates mitigation strategies and values resilience so that we are rewarded for taking additional action to benefit stakeholders.”
John Levy, Director of Impact, Franklin Real Asset Advisors

Climate risk is no longer distant —it’s already happening both physically and financially. The challenge now is not just measuring and disclosure, but action; businesses that integrate climate risk into governance and strategy will be better positioned for resilience and opportunity. Engaging with the scientific community is necessary and, where high quality data is available, making decisions that will endure in a changing climate. Find out more about Climate Risk and Flood Data Modeling.