Directors have a responsibility to identify and manage new risks
London, UK. January 22, 2009.
Firms have not identified or attempted to manage new risks triggered by climate change predictions according to a new study conducted by independent research firm Verdantix. The study finds that uncertainty on the timing of physical risks from climate change, insufficient analysis of the materiality of risks and a focus on cutting carbon emissions not strategic adaptation to a low carbon world holds back risk management.
“Directors have a responsibility to identify and manage new risks. But climate change risks have not been prioritized due to a perception that the risks are beyond the firm’s 5 to 10 year planning horizon” commented Rodolphe d’Arjuzon, author of the report. “This timeline assumption is wrong because long-term climate change predictions have short-term risk implications through government regulations and market responses today. Investment decisions on assets with long life spans – like airport runways and power plants – need to be based on assumptions about sustainability risks beyond 2020.”
The Verdantix report, Verdantix: Smart Vendors Sustainability And Climate Change Risk Consulting, identifies the key activities that CFOs and risk managers should undertake to upgrade their climate change and sustainability risk management capabilities. These activities include the need to:
- Manage GHG emissions-related risks. Policy-makers are set on a path to expand CO2 cap-and-trade regimes and impose more significant costs on emitters to meet international targets. Risk managers can turn to global regulatory risk advisers like Deloitte to identify and reduce exposures.
- Embed due diligence criteria in corporate transactions. CFOs and corporate development officers should embed sustainability risk management in corporate deal-making. Financial and commercial due diligence needs to flag up sustainability risks such as high carbon intensity products and increased risks from water scarcity.
- Screen industrial product development decisions. Firms like Rolls-Royce invest billions in the creation of new turbines which take years to bring to market. These investments must consider sustainability risks – such as oil scarcity and carbon taxes on flights – that will impact product performance and demand years into the future.
- Link property development to green buildings demand. In 2006 the energy efficiency and sustainability of buildings was nice to have. Today, property developers face severe financial risks if they do not incorporate sustainable design as a must have, reflecting a big shift in demand by corporate tenants.
“Climate change and sustainability risks are detached from the everyday business of most company directors – and people rarely prioritize what they don’t understand” said d’Arjuzon. “What’s more there is a dearth of risk identification expertise on sustainability issues in corporates because until recently this expertise simply wasn’t required. But now it is required which means that somebody needs to fill the gap.”
To fill the climate change risk management skills gap Verdantix analyzed the capabilities of 11 consulting firms and risk specialists that actively offer sustainability and climate change risk management advice. The report finds that:
- Adaptation risk management specialists like Acclimatise and Maplecroft are well-positioned to help commercial and government clients identify and analyze climate change adaptation risks. These specialist firms have a strong track record of translating scientific analysis into commercial risks for firms and infrastructure risks for municipalities.
- Specialist scientific analysts such as Climate Change Risk Management, the Met Office and AIR Worldwide deliver analysis of underlying sources of risk based on quantification of changes in weather patterns. Insurers, financial services firms and utilities work with these high-powered scientific consultants to stay at the forefront of risk identification.
- In-house risk analysts in insurers such as Marsh Risk Consulting and HSBC Insurance Brokers help firms to quantify sustainability risks and subsequently price the cost of insuring against those risks. Due to their role as risk underwriters, insurers and re-insurers have some of the best climate change risk modelling minds in the business.
- Audit firms like Ernst & Young and PwC have the expertise to integrate advice on climate change risks into an enterprise-wide framework for risk management stretching from products and projects to Board-level investment decisions.
“In the future, large losses will be incurred as a consequence of sustainability and climate change risks that can be identified today” said d’Arjuzon. “As the credit crunch has amply demonstrated, executives responsible for risk management can fall asleep on the job. The question is whether companies will wait for a crisis triggered by climate change before taking the risks seriously.”
The report, Verdantix: Smart Vendors Sustainability And Climate Change Risk Consulting, is available to download at www.verdantix.com.
Verdantix is an independent business research firm focused on climate change, carbon markets and business sustainability.
David Metcalfe +44 (0)7917845330
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