Raising CFO awareness of urgent climate-related risks and opportunities

Mounting evidence shows we are facing a climate emergency, for which finance leaders have a central role in steering their organisations’ responses.

Avoiding major climate-related disruption to many aspects of life, including economic viability, requires us to halve net greenhouse gas emissions in the next decade and reduce them to zero within 30 years. Failure to achieve these challenging global targets is likely to result in many businesses failing through severe damage to resources such as supply chains, customer bases and workforce health.

A dilemma for CFOs is that many of these physical risks to corporate viability will manifest in the longer term, beyond many investors’ short-term horizons. In 2015, the governor of the Bank of England Mark Carney referred to this dilemma as the ‘tragedy of the horizon’. Despite these traditional investment horizons, investors are now increasingly focusing on climate change as they become aware of the scale of associated financial risks.

In the more immediate future, growing public and political awareness and pressure means failure to respond to the climate emergency is not a viable option for most businesses, because of sizable reputational and regulatory risks associated with inadequate action today.

Businesses recognising this will not only identify and manage key risks inherent in transitioning to a low/no carbon economy but will also be open to substantial opportunities for developing new low/no carbon products, services and technologies.

A report by the UN Environment Finance Initiative in May 2019, from a study among large institutional investors, estimated such opportunities could help generate $2.1 trillion in additional profits across 30,000 listed companies globally. On the flip-side, policy-related risks to company value of transitioning to a low carbon economy were estimated to average 13.2% – ranging from 6.6% in services through 50.6% in utilities to 82.5% in agriculture.

These are significant risks and opportunities that pose major, novel challenges for many organisations. A growing number of companies are committed to clearing these hurdles.. For example, on 17 May 2019 the Grosvenor Estate announced a commitment, supported by specific targets, to achieve net zero carbon emissions from its large directly-managed UK and Irish property portfolio by 2030.

In developing accounting tools to help optimise complex trade-offs among their key sustainability risks and opportunities, CFOs need to recognise two major directions of causation: the impacts their operations have on climate change and the potential impacts of climate change on their operations. Sustainability accounting and reporting initiatives developed in recent years tend to address the first of these perspectives – managing and reporting a company’s contributions to global warming (and to other aspects of sustainability).

The second direction of causality focuses on the company’s climate-related dependencies. Irrespective of a company’s commitments to carbon reduction from its own operations (its impacts on climate change), it may still suffer from climate change caused by others (its dependencies). A major reporting initiative around climate-related dependencies emerged recently from central bankers’ concerns for financial stability from the ‘tragedy of the horizon’.

In 2017, the Task Force for Climate-related Financial Disclosures, chaired by Michael Bloomberg, proposed a novel approach towards companies reporting their material transitional risks, physical risks and opportunities associated with different scenarios of global warming.

Many companies are finding this type of reporting really challenging as it requires a very different approach towards identifying, managing and reporting risks.

However, companies involved in experimentation for this initiative find it can also help significantly raise their awareness and understanding of major risks and opportunities they face from climate change.

As both investor interest and climate risks grow, this is not a form of reporting or risk management that CFOs can ignore.

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