The organizations have perceived that there is an imminent threat to their existing business value systems vis-a-vis the climate change. But the extent and severity of climate change are extremely difficult to estimate and thus poses a unique challenge to the organizations for strategic decision making.
The Taskforce on Climate-related Financial Disclosures (TCFD) developed recommendations that will promote more informed investment, credit, and insurance underwriting decisions and in turn, “ would enable stakeholders to better understand the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks”. These recommendations serve to encourage organizations to evaluate and disclose, as part of their annual financial filing preparation and reporting processes, the climate-related risks and opportunities that are most relevant to their business activities.
Climate-related Risks
The climate-related risks are primarily categorized into transition and physical risks.
Transition risks are those that an organization needs to address for the case that the world is transitioning to a low carbon economy and how my organization is taking that into account and managing all risks that come from this transition. How fast or slow this transition happens has a bearing on all businesses, what is the nature of this transition
Physical risks resulting from climate change can be event driven (acute) or longer-term shifts (chronic) in climate patterns. Physical risks may have financial implications for organizations, such as direct damage to assets and indirect impacts from supply chain disruption. Organizations’ financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting organizations’ premises, operations, supply chain, transport needs, and employee safety.
Climate-Related Opportunities
Efforts to mitigate and adapt to climate change also produce opportunities for organizations, for example, through resource efficiency and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets, and building resilience along the supply chain. Climate-related opportunities will vary depending on the region, market, and industry in which an organization operates. The Task Force identified several areas of opportunity as
1) Resource Efficiency
2) Energy Source
3) Products/Services
4) Markets
5) Resilience
Before reporting, understanding and mapping these risks through the eyes of the models that are most relevant for an industry is a major task for the organization. This needs to be understood that this is a dynamic scenario and organizations may not be able to sit on their laurels for making one time assessment and leaving it there.
If uncertainty is hard to digest, then climate change is the mother of all uncertainties.