How risk managers can lead the way on the transition to net zero

There is no doubt that managing climate risks is crucial for business success.

Climate change poses threats to companies of all sizes, in every sector and region of the world. These include physical risks caused by climate change itself, but also transition risks on the journey to net zero.

Of course, where there are risks, there are also opportunities. These range from better resilience in the face of catastrophe and share price stability when disaster strikes, to higher sales due to rising customer demand for sustainable products and boosted reputation for firms that get this right.

Organisations are well aware of the need to ‘do something about climate’.

Whether it’s managing threats or pioneering new fronts, climate change is firmly on the board agenda. And there is evidence that risk managers are increasingly involved in these decisions.

“Risk professionals are at the front lines of businesses, whether they are navigating their organisations through the impact of physical climate risks or addressing intangible risks”

FERMA’s latest European Risk Manager Report found that more than half (56%) of risk managers were playing (or planning to play) a significant role regarding ESG risks.

Hoe-Yeong Loke, head of research at Airmic, says: “Risk professionals… are at the front lines of businesses, whether they are navigating their organisations through the impact of physical climate risks such as rising sea levels, or addressing intangible risks that are the result of reputational threats from greenwashing and from a new wave of regulations.”

Yet just 3% of respondents to the FERMA survey said that corporate social responsibility is now entirely a risk management responsibility. So, what exactly is the role of risk managers when it comes to climate-related risk and how can they carry it out effectively?

Understanding the threats

Not only should climate exposure already be part of the wider organisational risk management processes, risk departments can carry out quantitative analysis and truly interrogate the threats and opportunities.

Michelle Radcliffe, a director in the exposure management and climate analytics team at WTW, says: “The physical impacts of climate change are happening today; legislation impacting all sectors is being enacted to limit global temperature warming; corporate accountability is high, and we are seeing an increase in strategic climate litigation to hold companies to account.

“Risk managers need to fully understand and examine how these changes and developments will impact the risk profile of their business, while also looking for opportunities to harness.”

Thomas Riddell-Jones, climate change consultant at Aon, adds: “Assess the resilience of the business strategy, including identifying climate-related risks and opportunities and how they impact the organisation across a range of scenarios.”

“The enterprise-wide view of the risk manager is essential to the way companies deal with the transition to net zero.”

Of course, transition risks can be broad in scope and so risk managers need to find a way to pin down how these threats, whether regulatory, social, technological or consumer-focused, will impact their organisation.

Valentina Paduano, chair of FERMA’s sustainability committee and chief risk & compliance officer at Dedalus Group, explains: “The sustainability requirements are increasing and involve ever-larger processes… The enterprise-wide view of the risk manager is essential to the way companies deal with the transition to net zero.”

Keith Smith, senior manager of risk advisory and analytics at Barnett Waddingham, adds: “This means thinking about everything from an organisation’s employee proposition to its leadership and the skills of its workforce.

“Does the business have a compelling enough story to drive net-zero engagement? And are there enough skills within the business to ensure objectives are met?”

Building a network of allies

Collaboration across all departments is vital for a successful net-zero journey.

Risk managers must build relationships across teams, while sharing tools, techniques and frameworks to better reach goals. This should include knowledge uncovered during risk identification and assessment processes. This will help to save time and resource by reducing repetition.

Paduano adds: “The orientation of companies towards this goal will require a holistic approach that will depend on cross-functional cooperation and the risk manager will be key in this regard. This is especially so in the context of assessing suppliers’ sustainability.”

Assessing supplier sustainability

Indeed, assessing supplier sustainability is a crucial area where risk managers can add value. This means working closely with key suppliers to identify better sustainability processes, develop targets, model climate risk and record Scope 1–3 emissions.

Smith says: “[The role of the risk manager] is to ensure an organisation is not only challenging itself, but its partners and suppliers.

“It must ensure the risk management team is empowered to hold all risk owners to account. Not just for how they surface and manage risks, but how they collaborate across the supply chain to manage the risks and meet sustainability goals.”

“It is important to outline key responsibilities at board and management level.”

Embedding climate risk into strategy

Climate risk cannot be viewed in isolation, and risk managers must work with their organisations to embed it into business decisions at every level. This means CROs should take leadership over changes to risk management processes and across the supply chain.

Riddell-Jones says: “It is important to outline key responsibilities at board and management level. This is useful as it not only identifies where accountability lies but also the distinct role that distinct functions play in overseeing climate-related risks and opportunities.

“Disclose key climate risks, opportunities, and subsequent targets – with the metrics in place to meet these targets – in a clear manner. This makes it clear what the company is working towards improving – and what success looks like. Having targets that are derived from climate risk assessment allows for high-level qualitative insight.”

Reporting

There has been an enormous increase in the breadth and scope of sustainability reporting that most regulators now require. To help reduce this burden, CROs should ensure that internal risk analysis criteria are aligned with external reporting obligations.

Smith says: “The first question a risk manager should ask themselves is: ‘Am I being efficient with my reporting?’ Building a structure… into a consistent framework for the business will ensure everyone across the business better understands the approach.”

Loke adds: “Risk professionals should take the opportunity to turn regulations and reporting requirements… to their strategic advantage. For instance, the TCFD readiness reviews align the organisation’s key stakeholders on what the organisation wants to achieve from its TCFD project and ensures that any relevant work… is taken into account from the start.”

Paduano says another key role for CROs is forming a response to the double materiality assessment based on risk evaluations of ESG topics. She concludes: “The increasing influence of double materiality may lead certain risk managers to re-evaluate their enterprise risk management approach, which may need to be adapted.”