Taking action how to identify and prioritise climate change risks to your business

Climate change is driving unavoidable business change and disruption. Leading organisations are evaluating change impacts on their legacy business, proactively designing adaptive strategies to seize the opportunities, and optimise their pathways to their net zero future. In an earlier paper by the Ashurst Aurecon Alliance, we identified three areas of focus for business leaders to transform risks posed by net zero targets into opportunities. Here, we delve into how climate change risks can be identified, prioritised and reframed to support strategic decision-making and drive business success.   

For many organisations, asset owners and investors, climate change poses significant financial challenges and opportunities, with mitigation and adaptation required now to avoid the prospect of increasingly damaging impacts in the future. It would be difficult to find an enterprise risk assessment in 2022 that doesn’t feature climate change as a strategic risk. Leading companies are taking a prudent approach to pursuing a multidisciplinary, whole-of-enterprise appreciation of how climate change has affected their strategic context, what impacts change and/or uncertainty is having on their business, and what strategic risk management approaches will be adopted to increase agility and resilience. In many cases, this includes mapping the path to net zero as an early ‘must-have’.   

Organisations need to develop climate change risk management strategies that drive, maintain and ideally increase competitive advantage, while reducing the chance of negative effects. However, the large-scale and long-term nature of climate change makes identifying where to begin challenging, especially in the context of preserving risk and return profiles, competing operational demands and capital allocation. For business, climate change can be conceived as a ‘transverse risk’, which influences the likelihood and consequence of existing risk exposures. Given the need for businesses to manage climate related risks in all forms, the question quickly becomes: How does an organisation take something as broad and prolonged as climate change and figure out where to start taking action? 

Climate risk through the lens of your business

Place your business at the centre of the climate change risk problem, rather than the risk itself. For example, extreme rainfall could be a climate change risk, but restricted supply chain caused by extreme rainfall is the more meaningful risk to the business. So, extreme rainfall only needs to be managed or mitigated to the extent that the supply chain can continue fulfilling business objectives. A business-centric approach to managing climate change risk creates a framework for organisations to begin breaking down climate change in a way that is relevant to the business and connects climate resilience with operational objectives.

A resilience-based approach to climate change risk management

The way to break down climate change risk into decision-useful pieces is through a resilience-based approach to risk management. Resilience-based approaches focus on enterprise purpose, performance objectives, critical value drivers and risk appetite by prioritising and managing types of failure rather than identifying and managing discrete risks.

The following three steps outline how to frame climate change risk using a resilience-based approach. By virtue of its business focus, this approach excels in bridging gaps between the C-suite and climate change risks, which are characterised by long delays between cause and effect, often hiding the totality of climate change risk exposure and consequently, the need to take action. 

Step 1: Why does the organisation exist?

• Effective risk management in any approach should be anchored to an overarching goal. This ensures that subsequent activities from risk identification to treatments align with the direction you want to go. Done well, risk management aligned with a purpose allows organisations to move faster in uncertain environments. 
  
  For example, global firm ABC Pty Ltd builds, operates and maintains a nationwide portfolio of integrated logistic warehouses, to generate financial and non-financial performance returns for shareholders and exceed stakeholder and customer expectations.
  

Step 2: Identify critical services

• Identify the critical services, including those further down the value chain, your firm provides to direct stakeholders. These are services performed by the organisation that, if disrupted, could cause material stakeholder detriment, harm market integrity, threaten stakeholder interests, impact the viability, safety and soundness or financial stability of a business. After identifying which services are critical, articulate how much disruption to that service the firm and stakeholders can sustain and for how long.
  
  ABC Pty Ltd’s critical services may be identified as warehouse security and integrity systems, essential warehouse employees, regulatory and service contractual compliances, or other factors which are assessed as fundamental to the competitiveness and value-chain drivers of performance of the business. For each critical service, the risk appetites and tolerances for their loss or disruption can be considered. For instance, this could include the maximum outage durations and frequency of outage for warehouse security and integrity systems.

Step 3: Identify, prioritise and assess climate-based delivery failure

• Take a future-back approach from delivery failures and identify those that may be caused or aggravated by climate physical and/or transition risks. By identifying causality and interdependencies between climate change risks and delivery failures the firm creates a link between the risks and business objectives, which can be managed with meaningful results.
  
  ABC Pty Ltd can now identify how climate change has the potential to cause or aggravate risks to these business-critical services. For example, they might assess flooding impacts to the disruption of warehouse security, their employees’ own homes, and integrity of their essential warehouse employees’ access to work. Across the identified critical services, assessments can be completed on climate change exposure and sensitivity to disruption events that are exacerbated by climate change.  

These three steps begin a process of creating a link between climate change and the strategic decision-making of the organisation, providing a framework to assess and manage climate change risk in a way that is meaningful and valuable to decision-makers, stakeholders, investors and customers.

Authors: Elena Lambros (Ashurst Risk Advisory), Michael Duggan (Ashurst Risk Advisory), Michael Tafe (Aurecon), Ben McGarry (Aurecon) 

Ashurst Aurecon Alliance

In an industry first alliance with global law firm Ashurst, we seamlessly combine engineering, technical and legal advisory where asset and legal risk exposures and opportunities intersect.
We provide game-changing eminence and deep expertise from multiple perspectives, delivered cohesively to drive progress and achieve results. Together, we bring new thinking, to turn climate transition risk challenges into opportunities.
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