Developments in climate risk management and disclosure require directors to come up to speed — and quickly

  • Climate risks are foreseeable risks to business. They encompass three key aspects: physical impacts, the risks arising from a decarbonising economy, and changes to policy, regulation and litigation
  • The interaction between climate change and corporate governance is highly complex
  • Directors seeking to raise capital, attract investment, insure assets or avoid litigation, need to address climate change as a real and present issue.

Developments in climate risk management and disclosure require directors to come up to speed — and quickly

The physical impacts of our changing climate are now impacting societies, ecosystems and the economy. The impacts arise from the growth in emissions over the last few decades and, due to the vast inertia in the earth’s climate system, future damages are locked in for at least another 30 years, regardless of how fast we drive emissions reductions and decarbonise the economy. Global society, in the form of the UN-backed Paris Agreement, has determined that to prevent the worst outcomes changes in global temperatures must be kept to below 2°C and preferably below 1.5°C. To have a realistic chance of achieving this ambition, we need to reduce greenhouse gas emissions to zero by mid this century, creating a very different world with a very different economy and society to today’s. This article describes the nature of the risks and the management challenges facing boards today, with a particular focus on policy, regulation and litigation: an aspect that could be described as volatile and possibly even chaotic, due to the speed and scale of a number of drivers.

Understanding and addressing risks begins with ‘climate literacy’

Global climate change strategy may feel a long way from the immediate concerns and duties of company secretaries, directors and those charged with governance, but that situation is changing quickly. International ambition is being translated into national targets. The rules and mechanisms upon which global trade and capital markets are conducted are being restructured, to transition finance away from emissions-intensive economic activity and towards decarbonisation. Large investment funds are hunting for low carbon investments and the global insurance industry is openly discussing an uninsurable future for locations exposed to greater climate change impacts.

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