Four action points pivotal to managing climate-related risks

Comprehensive enterprise risk management strategies, including climate risk disclosures, are key to business resilience and sustainability.

The COVID-19 pandemic has reinforced and accelerated the need for governments and businesses to re-prioritize their management of the environmental, social and governance (ESG) issues that have the potential to inflict damage to economies and to drive a more balanced policy approach towards inclusive and long-term sustainable growth.

In fact, just before the COVID-19 outbreak, the World Economic Forum (WEF)’s Global Risks Report 2020 highlighted that the top five global risks are climate-related and most regional markets, including Malaysia, have not been spared climate-related disasters, such as floods, droughts and rising sea levels.

Climate change acknowledged but not addressed

According to the EY Climate Risk Barometer 2020 Malaysia , over three-fifths of the top 100 Malaysia public-listed companies (PLCs) surveyed reported their commitment to the United Nation’s Sustainable Development Goals (SDG) on climate action, SDG 13, which recommends corporates  step up disclosures on climate-related risks in governance, strategy and risk management. 

However, the analyses of the PLCs’ climate-risk disclosures indicate that most companies are at the nascent stage of climate risk reporting. Based on the Global Task Force on Climate-related Financial Disclosures (TCFD) recommendations, the PLCs surveyed scored highest in terms of coverage of metrics and targets at 45%, followed by risk management at 41%. Coverage of governance and strategy was lower at 22% and 24% respectively. Although over one-third or 34% of the 100 PLCs disclosed climate change-related risks, the quality of these disclosures scored just 12%.

Sectors: climate-risk disclosures benchmarked against TCFD recommendations

Moving forward, companies should focus on four action points in managing climate-related risks:

1.  Prioritize the impact of climate risk to business resilience

The ERM agenda of Boards needs to prioritize the impact of climate risk to business resilience and long-term sustainability. In their oversight role, Boards are integral in driving strategic discussions with management on climate risks. The assessment of climate risks and opportunities can strengthen current and future business strategies and build business resilience.

2. Step up ERM to include the likelihood and impact of climate risk

The ERM of companies can evolve to a more structured process including:

• Ensuring climate-related risk is evaluated according to ERM considerations, specifically on its likelihood and impact
• Conducting periodic assessments of emerging climate-related risks and opportunities in the near, medium and longer-term future

3. Integrate scenario analysis into ERM processes

Integrate scenario analysis into strategic planning and ERM processes and assign oversight to relevant committees or sub-committees. ERM assessments can consider the transition to a lower carbon economy consistent with a 2°C or lower scenario and, where relevant, scenarios consistent with increased physical climate-related risks in the following areas:

• Products and services
• Supply chain or value chain
• Adaptation and mitigation activities
• Investment in research and development

4. Set clear climate-related metrics and targets 

With the urgency to mitigate climate risks, companies can set clear climate-related metrics and targets to improve the quality of disclosures. Stronger stakeholder engagement across the value chain and more collaborative enterprise-wide efforts can spur the innovation of solutions in mitigating and addressing emerging issues on climate risks.