Risk & Resilience

It is quite clear that climate change is a real and present concern; one that is affecting our climate is clearly adverse ways. Looking back on the past 5 years, there have been a myriad of natural disasters in the form of hurricanes, droughts, and floods. In addition to the regrettable widespread impact on human life, the untold damage climate change is having on organisations is extremely detrimental to the way businesses operate. 

Damage and Insurance

The National Oceanic and Atmospheric Administration reportedly calculated 11 extreme weather events that wrought more than 1 billion dollars in losses [1] in 2012.

Insurance companies for example are already feeling the effects of climate change. The billions wrought in damage is costly and may make some areas uninsurable [2] where the unpredictability of the environment is adversely altering the risk assessments insurance companies undertake [3].

“In some high-risk areas, ocean warming and climate change threaten the insurability of catastrophe risk more generally… To avoid market failure, the coupling of risk transfer and risk mitigation becomes essential.” – Warming Of the Oceans and Implications for the (Re) Insurance Industry: Geneva Association [4].

Wildfires, last year laid waste to 10 million acres across the US mainland; Typhoon Bopha struck the Philippines destroying more than 300,000 homes, and extreme drought left over 1,000 towns in Brazil short of water leading to food shortages – due to livestock perishing – and growing tensions due to scarcity of water. Situation such as the latter in Brazil are a stark pointer to a world in which climate risks issue restriction on the resources which we take for granted.

Business Implications

In a business context, climate change has the potential to disrupt operations, devastating sections of the supply chain, or at least reducing access. These impacts have costs; costs which businesses cannot afford to ignore. It has been reported that climate change costs organisations between 1% and 5% depending on whether quick and decisive action is taken by policymakers, or not. Further, the impact of climate change has been suggested to double every 14 years according to a sectoral analysis covering 11 sectors such as oil & gas, food producers, and airlines, performed by TruCost [5].

In light of these alarming revelations, climate change – relative to a few years ago – is becoming a key risk issue. Investor communities for example, are increasingly concerned about the [financial] constraints of a world in which water becomes a scarce commodity; energy becomes so expensive, it diminishes organisational value; among others. Further, a survey completed by Ernst&Young in collaboration with GreenBiz Group titled, Six Growing Trends in Corporate Sustainability showed that shareholders are increasingly enquiring about the efforts a company is taking to reduce it energy consumption, its greenhouse gas reduction efforts, and how the company is responding to Corporate Reporting.

“Climate change should be amongst the top considerations companies will need to take into account when making long-term capital investment decisions.” – David Batchelor, CEO of risk management firm, Marsh.

Sustainability is an issue which organisations will have to keep in mind in future, if they are not doing so already as in future, it likely will become a potent threat to the health and vitality of business. On key way to do this is to access the business areas of an organisation, analyse all the products and services provided, and determine their exposure to climate change. Ask yourself what the worst case scenario is, and whether the organisation is prepared for it. It also makes sense to analyse products and services which are considered low net worth relative to high earning services and products as even they can be profoundly sensitive to supply chain shocks – a prime example is that of palm oil, and sustainability issues surrounding the widely used oil.

This is more commonly known as a Scenario Analysis and is a means of risk management. In this context, each product or service is analysed on its susceptibility to water scarcity, pressure on agriculture and potential risk, and excess deforestation to name a few. Assess where there are key vulnerabilities in the supply chain, and work within the organisation to address how these issues can be alleviated.

Conclusion

Climate change is a serious issue of our time. Whilst it presents risks, it also presents opportunities for business, organisations etc. to capitalise upon. By managing these risks, the resilience of the business entity can be fortified through securing (or at least exercising damage limitation on) supply chains, and as such enhance organisational value. Managing these risks will almost certainly positively impact on business value and share prices, and additionally create value for stakeholders as a whole. (For example, using more renewable energy reduces the associated externalities associated with oil and gas such as air pollution and local pollution which preserves natural capital – something good for the planet as a whole.) Further in managing these organisational risks, it can present opportunities – business and otherwise – and lead to innovation. The benefits that result in managing climate risks are yours for the taking.

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[1] State of Green Business 2013 – Joel Makower and Associates (2013)

[2] http://au.ibtimes.com/articles/484241/20130628/parts-world-increasingly-uninsurable-due-climate-change.htm#.UdGiGz7h5oY

[3] http://blueandgreentomorrow.com/2013/06/25/climate-change-is-making-parts-of-the-world-uninsurable/

[4] https://www.genevaassociation.org/media/616661/GA2013-Warming_of_the_Oceans.pdf

[5] KPMG (2012). Expect the Unexpected: Building business value in a changing world

Corporate Reporting and Its Integration into Businesses

What is Corporate Reporting?

Corporate reporting – also known as GHG Reporting, Carbon Footprinting, or creating a GHG Inventory for example – is the act of reporting a company’s (or organisation’s) emissions in a manner that preferably adheres to the following principles as defined in the WRI GHG Protocol[1]:

• Relevance – ensuring the reported emissions reflect the reporting company within a determined “inventory boundary” 

• Accuracy – ensuring the reported data is no an under- or overestimate as far as possible 

• Completeness – the faithful accounting of a company’s GHG emissions within the boundary justifying exclusions 

• Transparency – refers to the manner in which the data and reporting process is undertaken; there should be an audit trail to aid internal (and external) verification 

• Consistency – consistent, credible methodologies should be used to accurately measure emissions clearly documenting this

In a world, where the effects of climate change are being felt with a 0.8oC global temperature rise[2] – considering the fact that we as a planet need to limit temperature rise to no greater than 2oC above pre-industrial levels (1861-1890)[3], which involves cutting anthropogenic (man-made) emissions by 80%, and the fact that in May 2013, we passed the 400 ppm (part-per-million) milestone[4] – the need to manage our emissions has never been higher.

It is no secret that a majority of these emissions are from corporate activities, such as mining and aviation, and thus, as an aid to managing these emissions, corporate reporting is a means to find out just how much CO2e organisations emit. Not only can this information give an absolute figure of emissions, the value can highlight risks the organisation may be exposed to, such as regulatory risks, and opportunities to cut emissions, and thus fortify organisational resilience.

How Wide Spread Is Corporate Reporting?

Within the past few years, the concept of sustainability reporting is starting to take root. A reported 5,000 companies worldwide are reported to be issuing corporate reports according to CorporateRegister.com. Of the many reasons a company may choose to produce a corporate report, it can be agreed that there is certainly an increase in pressure from stakeholders to be more transparent about how an organisation conducts operations; about the steps a company is taking to manage its energy use; about the steps the company is taking to become more sustainable in its business practices.

For example, Harvard Business School Professor Robert G. Eccles, one of the leaders of the Integrated Reporting movement[5], said:

“Even so-called mainstream investors are increasingly recognising that a company’s ESG performance increasingly affects its ability to create value for shareholders over the long term, and can even put its license to operate at risk.”

Further, François Passant, Executive Director of the European Sustainable Investment Forum, said:

"Looking at non-financial aspects of an investee company is becoming the new norm for investors, and one has just to look at the spreading of ESG integration practices to realise this[6]."

Why Report in the First Place?

It is also very clear that companies produce these reports for a manner of different reasons. A study by Ernst & Young: “2013 Six Growing Trends in Corporate Sustainability”, highlighted the top four key reasons (among many others) of producing these detailed reports amongst the companies they surveyed were: increasing sustainability awareness (63%), for transparency with stakeholders (56%), enhancement of corporate reputation and brand (54%), and the creation of a competitive advantage (37%).

Being completely impartial, it is unwise to state that in completing a corporate report, there is a level of short-term risk involved; particularly reputation-wise. (What if the report is not completed to the required standards? What if the required information is found to be unavailable? What if the information found is not particularly positive?) But the risk is far outweighed in the long-term due to:

• Better measurement of the company’s triple bottom line – environmental, social, and economic performance - Reporting annually improves the methods and quality of reporting, which can be a distinct advantage when regulations become tighter, or reporting becomes mandatory; 

• Increased risk management - Corporate reporting can highlight the areas of the business that are exposed to risks linked to climate change (such as in the supply chain) and sustainability; 

• Increased operational efficiency - Highlighting the above mentioned risks can lead to innovations in product offerings and the way the company does business leading to increased productivity and efficiency; and

• Enhanced decision-making ability.

On the other hand, failure to report can lead to:

• Increased (and perhaps avoidable) business risk;

• Appearing less transparent with stakeholders – especially if competitors already do so.

The communication value of these reports is immense allowing the companies to reach customers, investors, business partners, media and a range of other stakeholders. They also have value within the organisation where they can be used as a tool to raise awareness of the non-financial aspects of the organisation, for example, having them become mandatory reading for employees. This can perpetuate the company’s aims if it is pursing sustainability initiatives, and wishes to cut out undermining activities in addition to aiding internal communication.

A document published in July 2013 by the United Nations Environment Programme Finance Initiative (UNEP FI) outlines that carbon footprinting will ultimately reduce policy, regulatory, and financial risks associated with GHG emissions[7], which will almost inevitably increase as the effects of climate change get worse[8].

GHG reporting additionally aids in the battle against climate change by indirectly supporting sustainable development. This is because as reporting highlights where emissions are coming from, where there are risks, and where they can be reduced, it is within the power of the reporting company to make the steps to reduce the emissions. As such companies will be better placed to drive investment toward low carbon projects – either internally such as renewable energy integration, or externally supporting international projects, i.e. carbon offsetting or carbon insetting.

Suggestions

As reporting is a means of documenting performance, it can be an aid to target setting and meeting goals. It may even aid in meeting goals the company has set; reporting helps the company identify business areas where costs can be cut, and resources can be conserved. Some targets imposed may take the form of KPI’s, or Key Performance Indicators, which can be used to measure performance internally and even externally with competitors assuming the KPI’s are comparable. These KPI’s are then often reported.

It highly instrumental to choose the issues and indicators (KPIs) your organisation will place focus upon determining the overall quality of the report, and will aid in its preparation. The organisation is encouraged to determine the extents of its operational and organisational boundaries to establish the scope of the reporting to again aid in the report preparation process[9].

To help decide what to report upon, the organisation could engage with stakeholders to determine what is important to them, so that when the stakeholder reads the finished report, they will have access to the information they have requested. Further, in engaging stakeholders, the organisation can better formulate strategies that align with the interests of the stakeholders.

Conclusion

Despite the challenges presented in producing these reports, it is hard to argue against the merits. It aids corporate compliance, better prepares the company to future regulations, identifies risks and resilience issues. It is useful as a means of determining whether the company is meeting emissions targets, and strengthens the organisations longevity by identifying where costs can be minimised and drives sustainable development.

The act of reporting will not simply vanish. New legislations such as the UK’s Mandatory Reporting comes into effect this year (2013), which will make it compulsory for FTSE companies to do corporate reporting with the long-term goal of extending it to all companies. Further, in producing these reports, it is hoped that in time, the tools required to produce high quality reports will improve[10] – having being termed “rudimentary” – compared to the tools used in financial reporting for example.

Written by: Jimmy P. Olet

[1] http://www.ghgprotocol.org/standards/corporate-standard

[2] http://revcom.us/a/305/urgent-climate-change-wake-up-call-en.html

[3] den Elzen M.; Meinshausen M. (2005). Netherlands Env. Assessment Agency. Meeting the EU 2°C climate target: global and regional emission implications.

[4] http://www.theguardian.com/environment/2013/may/14/record-400ppm-co2-carbon-emissions

[5] State of Green Business 2013 – Joel Makower and Associates (2013)

[6] http://www.businessgreen.com/bg/news/2283988/investors-demand-clearer-sustainability-reporting

[7] http://www.businessgreen.com/bg/news/2283988/investors-demand-clearer-sustainability-reporting

[8] http://www.unepfi.org/fileadmin/climatechange/UNEP_FI_Investor_Briefing_Portfolio_Carbon.pdf

[9] Ernst&Young – Seven Things CEOs Boards Should Ask About Climate Reporting (2013)

[10] State of Green Business 2013 – Joel Makower and Associates (2013)