Climate Risk Reporting is similar to the annual reports that companies compile which disclose relevant information about the company, its growth, new opportunities in the market, financial data, research, and developmental activities. This annual report is integral to all stakeholders, especially investors who make all investing decisions, only after closely analyzing these records. Likewise, these reports provide information on issues that businesses are facing along with their strategies to help curb these issues. Collectively these reports serve the purpose of equipping investors with the information they need and also as a means of attracting them. Today as investors become more conscious of climate change, the corporate sector is under great pressure to release the above-mentioned reports as part of regular corporate practice.
How is Climate Change a Business Issue?
The truth that many of us are still unaware of, despite it being the 21st century is that climate change is not something that is just meant to be discussed casually from time to time. It is real. It is happening and it is affecting everything from our daily lives to national economies. Likewise, businesses and industries are not liberated from the consequences of climate change either.
In fact, climate change is agreed to be one of those rare environmental problems that tend to affect all companies no matter how big or small, regardless of the industry they belong to. So for example, if the energy sector suffers or undergoes changes in business practices due to the consequences of climate change, it would be only reasonable to expect that the textile industry and agriculture industry are bound to undergo changes as well.
Generally, all industries and companies have hundreds of stakeholders involved that are affected by any changes in the corporate sector which itself is subjected to changes in the external environment. Therefore, as the energy sector and other industries are inevitably being affected by climate change, stakeholders within and outside the business environment are being affected as well. The energy sector for example will be subjected to variations in business practices when climate change leads to a disruption in water cycles and impacts hydropower. Likewise, climate change will also affect the industry’s demand as more energy will be required in summers for cooling and less energy will be required in winters for heating. Therefore it would be reasonable to expect companies operating in this sector to forecast the impact of climate change beforehand and develop strategies to deal with them accordingly. All of this information can easily be communicated through Climate Risk Reports which will be discussed shortly.
Having demonstrated the influence of climate change on industries, next up we must discuss how this has created a need for Climate Risk Reporting that is gaining popularity in many parts of the world now.
The rise of such practice:
It is gaining popularity among investors for the following reasons:
- Without complete climate risk disclosure, investors do not have a full picture of what they are investing their money in and therefore the risk is much higher. However, with proper reports, investors can get a better grip on these important matters and invest in companies with greater confidence
- Investors can easily use climate risk reports to distinguish between companies. As the global market is becoming competitive, investors do often worry about finding the right business to invest in. In such cases, an effective climate risk report can make a company stand out among the rest and make the decision process easier
- Perhaps the most important reason is the security that comes along with it because of the great uncertainty climate change has caused. It is said that an average of $2.5 trillion which is 1.8% of global financial assets would be at risk if global temperatures rise over 2.5℃ by 2100.
In many parts of the world, primarily the United States, companies have been obligated to submit climate risk reports to the SEC as an effort to move the corporate world towards sustainability-oriented dynamics. Several types of reporting such as TCFD, IFRS, and ISSB are all focused on climate risk reporting.
Similarly, on 2 July 2019, the UK Government has also announced in its Green Finance Strategy that all listed companies are to disclose information in line with the Task Force on Climate-related Financial Disclosures (TCFD) framework recommendations by 2022 under four core elements: Governance, Strategy, Risk management, Metrics, and targets. Companies have also been encouraged to use technology and software to make the data-gathering process for risk analysis more effective. Machine learning programs for example Natural Language Generation and NLP that classify as deep-learning applications relying on neural networks can be used to predict climate risk.
All these examples go to signify the relevance of these reports in the global corporate world today and shed light on the possibility of its release becoming a mandatory corporate practice in other parts of the world too, in the future.
Significance to the energy industry:
This practice is extremely beneficial to the energy industry and can assist in the sustainable development of this industry.
Apart from the fact that the practice of disclosing all climate-related affairs in common corporate practice will help the industry attract environmentally conscious investors, there are other factors to keep in mind too.
For example, it is going to encourage the usage of renewable resources for energy production which is not only good for the environment but in the long run will help reduce costs and uncertainty regarding energy production, considering that conventionally used fossil fuels are non-renewable and the world could run out of them any day.
Moreover, because the energy sector has attracted a great deal of criticism from the general public as well as sustainable Organizations over its environmentally damaging practices, notably the burning of fossil fuels, it is quite important for companies working in the industry to generate these reports for stakeholders to win competitive advantage and attract investors who might have been demotivated by the idea of investing in energy sector business (due to public criticism).
As a whole, since these reports make companies more accountable for their actions and the strategies they employ to deal with climate change, they can encourage them to act more promptly and responsibly.
The good news here is that an analysis of the 2019 EY Global Climate Risk Disclosure Barometer has shown that the energy industry is the best industry in terms of its performance of both quality and coverage for Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
Conclusively it can be said that with the practice of climate risk reporting, we can expect both more stable and sustainable economies in the future.