Managing evolving climate risks requires new forms of thinking and culture
Risk Management News
By
Kenneth Araullo
Climate-related issues are increasingly being recognised as significant financial risks to businesses, necessitating a strategic approach at the board level. In a new report, WTW describes this shift as a reflection of the growing need for boards to adapt their thinking and culture to address long-term business strategies and stewardship in the face of climate change.
The evolving business landscape, marked by heightened natural hazard risks causing more frequent interruptions and damage, underscores the imperative for board action. Societal expectations are also aligning more closely with a lower carbon economy, driven by customers, investors, and regulators.
The current trajectory suggests an urgent need to transition to a lower carbon state, with the economy facing a trade-off between higher transition risks now or increased future physical risks due to delayed action.
In this context, climate is seen as a critical business risk requiring management and navigation by board directors. This risk trend spans almost all economic sectors, presenting substantial opportunities as well as challenges.
The role of boards in climate governance
Board mandates are increasingly incorporating climate governance as a key element, with responsibilities spanning regulatory conformance, driving organisational performance, and ensuring sustainability and future-proofing. Each of these areas has a direct correlation with responding to climate change risks and opportunities.
In terms of regulatory conformance, boards are tasked with ensuring organisations meet evolving climate-related regulatory and investor expectations. This includes fulfilling regulatory requirements, commitments to stakeholders, and community obligations. Boards must be climate-literate and comfortable with public disclosures, necessitating the development of appropriate skills, knowledge, and governance structures.
Regarding organisational performance, the primary responsibility of any board is long-term value creation. This involves taking a long-term view to mitigate risks and create and preserve value. Boards are expected to articulate a clear strategic business case for climate action that aligns with their fiduciary duty and the organisation’s purpose.
Finally, in terms of sustainability and future-proofing, boards are responsible for ensuring the company’s robust planning for adaptation to a lower-carbon economy. Effective transition plans are seen as crucial for demonstrating a company’s long-term investment value. Transition planning, encompassing board oversight, financial planning, risk management, and cultural alignment, is integral to a successful business strategy in the face of climate change.
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