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How your company can embrace a climate-risk mindset
In this episode, podcast host Chris Hagler meets with Mardi McBrien and Lauren Rogge to discuss good practices for understanding, managing and disclosing climate risk and opportunities.
Podcast host, Chris Hagler, talks with Mardi McBrien, Managing Director of the Climate Disclosure Standards Board (CDSB), and Lauren Rogge, from EY’s Climate Change and Sustainability Services, about the growing focus on climate risk, opportunities for companies to embrace a climate-risk mindset, and better alignment with the Task Force on Climate Related Disclosures (TCFD) recommendations.
For the last several years, the Intergovernmental Panel on Climate Change, (IPCC) has warned that the damage from climate change will happen at 1.5ºC warming, not 2ºC as we had previously understood, and it urges significant action by 2030 to slow the warming.
In addition to concern from the scientific community, investors, regulators and central banks are pressing for companies to better understand, manage and disclose their climate risk and opportunities.
In this podcast, Mardi, Lauren and Chris discuss what companies can and should do when it comes to embracing a climate-risk mindset.
Key takeaways
Climate change presents a source of both risk and opportunity to companies in all sectors.
Shareholders and stakeholders expect companies to be transparent and to disclose their efforts, successes and challenges.
Many companies have made commitments to reduce their environmental impacts and improve their climate risk governance, strategy, risk management and related disclosure. While commitments are a good start, further and bolder action from business is needed. CDSB recommends developing a roadmap that provides a path for your company to achieve the TCFD recommendations. Access the TCFD Good Practice Handbook,to identify good practices.
For your convenience, full text transcript of this podcast is also available.
Chris Hagler
Welcome to Sustainability Matters. This is a podcast series from Ernst & Young, EY. My name is Chris Hagler, and I’m one of the leaders of our Climate Change and Sustainability practice and your host for this series. We designed this podcast series to provide leading trends and practical advice around environmental and social and governance, or ESG, issues and opportunities facing business today.
Today our topic is Climate Risk and Disclosure. This topic is not a new one but is one that has really been building in importance for the last several years. The IPCC, the Intergovernmental Panel on Climate Change, which is the UN body for assessing the science related to climate change, published a seminal report in October of 2018. It concluded that the potential damages from climate will happen at 1.5 degrees Celsius warming, which is less than the 2% that we had previously understood, and it urges significant action by 2030 to slow the warming. In September of 2019, the IPCC published a special report on the ocean and cryosphere in a changing climate further demonstrating the damage to our planet. While globally, company employees and students are marching for climate action, but what can, and should, a company do as it relates to climate change?
Today, I am pleased to welcome Mardi McBrien, the Managing Director of CDSB, which is the Climate Disclosure Standards Board, and Lauren Rogge, a colleague of mine here at EY, to discuss the practical actions your company can and should take. Mardi, as we get started can you share some background on CDSB and what the organization does?
Mardi McBrien
Sure, CDSB, the Climate Disclosure Standards Board, was set up at 2007 at the World Economic Forum. And if you think back to 2007, where we were at, we had companies that were just starting to think reporting their greenhouse emissions. We had a Greenhouse Gas Protocol established, and it was sort of becoming a bit of business as norm to put that sustainability report or maybe report that to CDP, which was the Carbon Disclosure Project back in the day. We had investors that were a very informed bunch that were just starting to think about this sort of information and what it could mean, but it wasn’t being presented to them in a way they could actually use it, so a consistent, comparable, decision useful manner.
And if you think back to 2007, it was pre-Copenhagen, which was supposed to be the cop that was going to change everything, but post-Kyoto, and the governments weren’t really ready to think about acting and regulating in this space. A group of business and environmental NGOs came together, and they set CDSB up. Now that was really to come together to create the equivalent of, I guess, interpretive guidance for accounting standards to help companies report material climate and laterally environmental information into their mainstream report with the same rigor as financial information.
Hagler
Awesome. I think I saw you recently released a handbook, or a guidance, or something to make this a little bit more practical and accessible for companies.
McBrien
Sure thing. So, I guess across that period of time you can put accounting interpretive guidance out into the market, can’t you, and as a business, you’re familiar with interpreting that. But these new non-financial issues are a bit more tricky than that. They’ve been hard to get your head around sometimes to understand how they actually apply to business and how to report that.
Over the years, we’ve produced a number of, I guess, reports and studies, and holding-hands sort of guidance. And most recently we’re responding to the Task Force on Climate-related Financial Disclosures, which was set up in 2017 by the Governor of the Bank England, Mark Carney, and chaired by Michael Bloomberg to really, really take this agenda forward and put climate risk disclosure at the front of everyone’s minds, and they published recommendations. Recommendations are great, but they don’t actually help you do anything.
This week we worked with our good friends at the Sustainability Accounting Standards Board, SASB, and we took their metrics and targets and combined them with CDSB’s strategy governance and risk structures that we have within our framework to produce a handbook to tell people, “Hey, you can do this.” But I think that’s the tricky bit. Where do you get started, and then what do you do? And then the next question you get asked is, “But what does it look like?”
Recently, we launched the handbook. That sort of answers that, “What does it look like?” question that companies really need sometimes to get it started, to get them over the line to help them know where to go. But we’ve been talking about the TCFD, the Task Force on Climate-related Financial Disclosures, and that really is and has set the new standard for what constitutes good climate governance for the 21st Century.
Hagler
And Lauren, I know I see this with my clients all the time. I think Mardi hit the nail on the head. You’re like, it is so overwhelming to think about climate and what that means to my company and what I should be doing about it. Are you seeing that with your clients and figuring out how to understand the risks and then disclose them?
Lauren Rogge
Absolutely. I think climate risk is one of the most complex and long-term risks that we’ve seen as compared to other traditional business risks, and it really takes a lot to understand and measure the potential impacts, particularly financially, that a company may have.
There’s also a rapidly growing acceptance amongst a large group of stakeholders that this issue is really important. And we’ve talked about the investor piece and you mentioned the scientific community. And then there’s just the fact that businesses are seeing the impacts themselves. They’re experiencing increases in extreme weather events that are impacting their supply chains. We had a record heat wave in Europe this year that affected the Rhine River to the point that many companies were impacted in sort of getting their products in and out of their facilities.
Hagler
Personally, I was impacted by record temperatures in July (Laughs) in the United States, or across the world, I think. Wasn’t it the hottest month on record ever?
Rogge
(Overlap) Hottest month, yes.
McBrien
(Overlap) It was.
Hagler
Mardi, maybe you can start and share with us some of the good practices that some organizations could consider. We like to keep this podcast kind of practical and sort of like what do we do? What are some things you have reported?
McBrien
Most importantly, you need to stop. Have a look what you’re already doing inside your business. Climate might be a new risk, but you’re in business, you’re successful, you know how to manage risks. You have people that understand how to manage risks. The finance department is a great place to start because they have oversight of the whole business. Talk to the finance department. You need to get a champion internally. I guess start there. Get a champion. Find your friend, be it on the board level, the CEO, the CFO, someone who can really help you guide this through the business.
Look at what tools you already have internally. You have internal management systems, internal controls. You have systems in place to gather and report data. See how they could be adapted to include these new sort of metrics and targets that you may need to be setting. Talk to lots of people about it. Get people involved. Get people interested and excited. You don’t know what they’ve got.
Recently, there has been the launch of the Corporate Reporting Dialogue’s Better Alignment Project, and what that demonstrates is all those companies that are already reporting to organizations like GRI and CDP, and through SASB targets and metrics, have a lot of this climate information already in their business, in their organizations. You don’t need to duplicate that. You don’t need to collect it again. You just need to make sure it’s fit for purpose and process that through the business. It will lower the costs and make this happen a bit more quickly. So, look what you’ve got first before you go out and start to commission big systems to collect more data.
And also, you mentioned briefly how climate was affecting us this last summer personally, but before you go out and spend also loads and loads of money on scenario analysis just stop for a moment and think about you and how it affected you this summer? Could your kids get to school? Last winter, did your kids get to school? Could you get to work? Could your team get to work? And once you work out how these things kind of affect you it’s much easier to communicate with everyone around you about what this really means and get them involved in the conversation.
And then, of course, collect your data and prepare it with the same rigor that you would if you were going to get it audited and go through those sort of processes. But you know, you’ve probably got a lot already and just get started. Publish a road map of how you’re going to do it over five or eight years. Be transparent about it, but just get started.
Hagler
What I heard you say is, you believe that most companies already have a lot of this information. Certainly, most understand their greenhouse gas and what that is. But do you see that, Lauren? Do your clients pretty much have this information, but they’re just maybe not using it in a way where they can understand their climate risks?
Rogge
Yes, I think two things. I think, one, definitely there’s a lot of data that companies have been collecting for years and reporting through their sustainability reports or their CDP reports. A lot of the impacts that climate causes are business continuity impacts that they’ve been dealing with for many years, and this is just an exacerbating factor. So, a lot of those business continuity processes and protocols are something that they’ve already been thinking about and that can be reported.
I think the second piece is, companies also have sophisticated ways to manage risk. They have enterprise and management processes already. And as Mardi said, you want to tap into those processes because that can provide you with the governance that you need, the escalation points up to the right senior management and the board. It can provide you with the right skill set. So, risk managers already know how to do scenario analysis. So, leveraging those skills to do that for climate scenarios just makes a lot of sense.
And there’s a lot of other aspects of risk management that really will help just manage this risk in the way that businesses have been managing any other business risk for many years.
Hagler
And I should add, we actually have a previous podcast we did specifically on integrating ESG risks into enterprise risk management. For our listeners, you can go back and listen to that and learn more about it. What’s taking so long? Climate risk is not anything terribly new. As I said at the beginning, we’ve been aware of climate change for a very long time, but we really haven’t been to where it’s been integrated into our risk management, our financial reporting, our disclosures. What’s taking so long, and why now?
McBrien
I think there’s a number of ways of looking at it. Some businesses just get it. They understand how this helps them create and sustain value in the long-term part of their bigger, sort of integrated, right across their business, along with a number of other issues. You know, we have leading CFOs and CEOs out there that really, truly get this and understand why it matters. And then there’s the others that are only really going to do this if there’s a stick attached to it.
I think we’re starting to see the sticks coming forward more and more in various different guises. We’re seeing central bankers now saying, “This is a risk. We are going to need to report it.” We’re seeing emerging legislation and practice through different forms. For example, we’re seeing interpretive guidance to accounting standards out of Australia. They’re saying, “This is a risk. It’s a foreseeable risk. We expect you to report on climate change, and here is your guidance.”
We’re seeing the European Union issued on guidance now on reporting climate in mainstream reports, and it looks like that will be mandatory by 2022. The UK government has issued its Green Finance Strategy that says companies and investors will need to report material climate change information in their mainstream filings by 2022.
You know, I think the stick is really starting to come down on companies now, and I think if you start moving and acting now the cost of inaction is going to be a lot more for you when you have to catch up when the stick starts to get a lot closer to you. (Laughter)
Hagler
Well, Lauren, I didn’t hear any sticks in the United States.
Rogge
No, not so much. (Laughs)
McBrien
But I think this is where you have to look back and reflect what you sort of “matters.” And that is that in any sort of law across the world you are required to report risk to your investors.
Hagler
Right. And I know that we often see that something that happens in the UK, in Europe, in Australia, it’s going to find its way to the United States eventually. So, maybe not by 2022, we might not have a stick here by then, but you never know.
McBrien
I think we’re going to see a lot more legal precedent here, too. I think there are going to be more jurisdictions around the world where CEOs and company directors will be taken into account for not exercising their fiduciary duty, for not taking account of these risks. And I think if we don’t get a regulatory stick, I suspect there will be a number of these sort of cases that start coming forward that really putting directors and CEOs and chair people on notice to say, “Hey, you’ve been told.”
Hagler
We’ve talked a little bit about the issues, we’ve talked about the guidance that was created, let’s talk about some of the leading practices and what we want companies to do. Let’s talk about something practical.
Rogge
Well, I think, as Mardi said, number one, look at what you’re already doing and account for all of the activities across your business that you’re already doing to understand and manage this risk. But then I think it’s critical that you really make a commitment. Many companies, I think over 800 companies, have signed up to the task force recommendations publicly. Others have agreed to the commitments of the Paris Accord or even just creating their own renewal energy targets. I think those send a strong signal to the market that you as an organization are taking this seriously.
The commitments are not enough. You also need action, and I think we’re moving into that phase where we really need to see companies taking strong action. And recently we saw some of the boldest actions from the finance community. We saw an alliance of the world’s largest pension funds and insurers responsible for more than $2.4 trillion in investments commit to a carbon neutral investment portfolio by 2050. We’ve also seen shipping companies committing to being carbon neutral. So, those are commitments, and it’s going to take a lot of work for them internally to then understand how to achieve those goals. But I think that’s really showing some of the leading practice in paving the way.
Hagler
Figuring out what you already have or analyzing the data you already have, making a commitment, and then taking action against those commitments are the steps we see companies should take. How important is it to disclose this information externally? I know there are some companies that are pretty hesitant to actually talk about the things that are going maybe not so well with their greenhouse gas efforts or their carbon reduction efforts. How important is that?
McBrien
I think it depends on your audience. And I think you give your right sort of information to the right sort of audiences, don’t you? One audience that really likes commitment and really just wants to see all the work you are doing, whether that be your local community, whether that be your staff, whether that be, more broadly, your investors or governments. So, it depends on who you’re talking to, I think, on this. And disclosure and reporting is kind of the end game as well. It’s all the action that you take before that. It’s the targets you put in place, the KPIs you put in place, the things you’re working towards.
And I think as long as you map out that road map about what you’re trying to achieve, you’re not mapping out a 2-year road map, you’re talking about a 10-, 20-, 30-year road map. Where if it’s your reporting, it might be a five-year road map to where you want to get to, but lay it out and be honest about it. I think any investor understands this is not one to be easy, but they want to be able to have a conversation with you about what you’re trying to do.
Lay it out and have an honest conversation, but reporting is literally just the end of, the very last piece in this, but what the market does need if we are going to mobilize the capital. That is going to help us secure that 1.5 degree-future in the sustainable transition we are going to need. Markets do need that consistent, comparable, decision-useful information to be able to act.
Rogge
Yes, I’d agree with that. That we are really entering this phase where in ESG kind of more broadly, that if you don’t tell your story effectively, it’s going to get told for you. So, I think that there’s a lot of investors and rating agencies out there that are looking for information here, and if you’re being silent on what you’re doing about climate risk, the markets will now and in the future definitely start to punish you for it.
Hagler
Or as you said, somebody else is going to tell your story based on whatever information they can get about your organization. So, the disclosure is somewhat about just controlling the message out there.
McBrien
And you can tell your story better than anyone else can tell your story.
Hagler
Right.
Rogge
And it takes time. The processes that you have to go through to really influence the way that these issues are managed from a governance perspective or to perform scenario analysis and get comfortable with the rigor, to really explore the material risks that you face, both physical and transitional, that process is going to take a couple of years to put in place. And so, you want to kind of start it now so that your disclosures in a few years’ time, particularly when and if they become mandatory, that you’ve got those structures in place so that you’re comfortable with putting that data out publicly.
Hagler
Absolutely. Mardi, CDSB, I’m sure, is always looking to the future and always looking to provide additional insights and guidance for us. So, what’s coming next from CDSB?
McBrien
So, CDSB was traditionally climate-focused, and then we expanded to cover environmental and natural capital-based information. And what we’re starting to see now with climate rating right up the radar is people want to move beyond climate now and start how they can report the EVSG into their mainstream filings, again with the same sort of rigor.
So, we’re doing a lot more work now in that space and really starting to inform and work with companies and governments to make that happen. And I suspect it won’t be long behind that before we’re moving out to cover social issues and providing that framework as they’re becoming more and more in our transition to a really sustainable future. I’m sure that’s going to keep me very busy.
Hagler
(Laughs) Fantastic. Lauren, any final thoughts?
Rogge
Well, I think we’ve talked about a lot of the different steps a company can take and there’s a lot of great guidance out there, but I think at the end of the day this is about resilience and preserving the long-term value of a company. And so, I think you want to be able to really understand your material, transitional, and physical climate risks and be able to answer the question of what does a two-degree Celsius scenario look like for our business in the future?
Hagler
And Mardi?
McBrien
We had Climate Week this year in New York, and one of the most powerful messages that came out of that was we had the Roaring ‘40s, we had the Swinging ‘60s, we had the naughties, whatever they are, but this really is, the decade of the ‘20s is going to be the decade of climate change, and we all need to start now and just start somewhere, and take some action whether that be big action or small action, but take action.
Hagler
Thank you both very much. It’s been very helpful, and I’m sure that our listeners, our business leaders, have gained terrific insights on this important issue of climate action and disclosures.
If you want to learn more, you can access The Good Practices Handbook at CDSB.net. And you can learn more about EY’s point of view on climate at our Sustainable Impact Hub at EY.com. You can also follow EY @EY_Sustainable or follow me at @ChrisHagler. And please be sure to subscribe to EY’s Sustainability Matters podcast on iTunes or wherever you get your podcasts. Thank you.
