Reporting on Climate Risk? Here’s What Your Investors Are Looking For

With climate change posing risks to assets and operations all over the world, ESG managers and their higher-ups are focused on ensuring their companies’ climate risks are adequately covered in disclosures.

But for most investors, disclosure is not enough. As concerns over greenwashing and climate inaction grow, companies must also develop the appropriate climate risk management processes to address the threats they face. 

According to Harvard’s ESG Global Study 2022, 47% of investors said they were focusing on climate change that year, up from 44% in 2021. Investors are developing methodologies to not only assess disclosure coverage. They’re creating ones that determine the credibility of companies’ decarbonization plans, how well firms are actively managing their climate risks and opportunities, and whether they’re following through on their climate commitments.

What’s at stake without climate risk management

Treating climate as a communications exercise, rather than a strategy and planning one, doesn’t just cause climate-conscious investors to overlook certain companies. It also exposes these businesses to serious physical and transition climate risks.

Physical risks

Physical climate risks have the ability to cause asset and property damages, supply chain disruptions, increased material costs, and limited access to capital. The TCFD identifies two types of physical risks.

Acute risk

Acute risks are driven by individual events, such as extreme weather events like hurricanes and droughts.

Chronic risk

Chronic risks are long-term changes in climate patterns, such as higher overall temperatures. This can lead to adverse impacts at the ground level and may contribute to things like rising sea levels and chronic heat waves.

While many companies have done the initial work of identifying their climate risks, identifying risk does not mean a company is addressing risk. A CDP report discovered a clear gap between the way companies identify climate risks and opportunities and how they prepare for them. This discrepancy leaves companies vulnerable — and investors wary.

Manifest Climate works to improve your company’s climate management through disclosure reviews and a series of questionnaires. By assessing and providing recommendations for improving climate management, Manifest provides decision-useful information that you can present to executives, board members, and investors.

Transition risks

The measures, requirements, and policies created to respond to physical climate risks pose transition risks to companies if they fail to adequately prepare and comply with them. The TCFD lists a number of climate-related transition risks.

Policy and legal risks

Companies will need to comply with emerging policy and legislation around climate change mitigation and adaptation, such as carbon pricing mechanisms and energy efficiency improvements. These changes may affect companies financially and expose them to ongoing litigation if they fail to adapt to or mitigate the impacts of climate change, as well as disclose their climate-related financial risks.

Technology risks

The era of green business is ushering in a new wave of technology, and many companies will be impacted — for better or worse — when new technology replaces the old. Organizations relying on demand for older technologies will likely lose out in the long term if they fail to acknowledge the demand for greener products. However, those that adapt to technological changes may rise to prominence as a result.

Market risk

A focus on climate will result in significant market changes, such as shifts in supply and demand for particular commodities, products, and services. As climate-related risks and opportunities become key drivers of corporate and consumer procurement, companies across all industries need to consider whether the footprint of their products and services will serve as a competitive advantage or disadvantage in the future.

Reputation risk

Greenwashing accusations are frequent and damning when companies say more than they do. That can result in investor fear, consumer boycotting, and even costly lawsuits. On the flip side, companies that do take action on climate but fail to communicate this to investors and stakeholders risk ‘green-hushing’ — saying less than they’re doing and failing to build investor trust or benefit from investment.

Manifest Climate reveals your company’s ‘say-do’ gaps on climate, highlighting areas for change and recommending next steps for climate action.

Opportunities

Ultimately, it’s not just about managing risk. Anytime climate risk management is part of the picture, there are also opportunities to capitalize on. The TCFD identifies a number of climate-related opportunities for companies, including:

• Resource efficiency — improving efficiency can directly improve organizations’ bottom lines
• Energy sources — shifting to cleaner energy sources can bring financial benefits
• Products and services — developing new, low-carbon products and services that companies can capitalize on
• Markets — openings in new markets or asset types can help firms diversify their activities and prepare for a low-carbon economy
• Resilience — adapting to climate change to better manage risk and opportunity

Companies that proactively follow through on climate targets and build climate maturity open the door to becoming leaders in their industries. This builds trust, drives industry-wide change, and allows a company to become a preferred name among investors and consumers.

Manifest Climate identifies your company’s climate maturity and offers best-in-class  peer examples, benchmarks, and resources to advance it and capitalize on the benefits of climate leadership.

Ready to learn more? Book a free demo today.