Reducing risk in a time of climate transition

Climate transition is front of mind for most business leaders, portfolio and risk managers around the world in 2022.

Organisations face increasing pressure to adapt and accelerate carbon transition plans to operate within ever tightening global carbon constraints. Increasing scrutiny by investors demand more robust validation of climate action and carbon transition.

This year, governments and regulators are expected to put in place more stringent compliance and requirements for carbon reporting. Greenwashing won’t cut it anymore.

According to Cathie Armour, commissioner at the Australian Securities and Investments Commission (ASIC), investors will demand organisations to share more meaningful and useful evidence to inform their decision making.

In 2022, risk managers will play an increasingly important role in responding to growing expectations, addressing significant governance issues, and assessing carbon risk and opportunity for their organisation and investors.

Navigating climate compliance and reporting is complex and current methods have their limitations. Today, much of the analysis and reporting is qualitative, making it difficult for risk and portfolio managers to avoid greenwashing.

Inconsistent measurement tools make it difficult to track progress, at an organisational level or against industry benchmarks.

Many of the methods currently in use fall short of quantifying the financial exposure relating to carbon transition – both from the potential loss of carbon exposure through to the financial opportunities of positive action.

Bridging the gap in carbon reporting and analytics

Among the changes risk managers should look for in 2022 are:

• Carbon tracking which goes beyond the measurement of carbon emissions or credits. It is now essential to understand financial resilience and efficiency to a carbon constrained world, and 
• Quantitative, not qualitative, data analysis, which is needed to win the trust of investors and regulators, while overcoming misleading greenwashing.

The key to creating a rigorous assessment of financial resilience to a carbon constrained world is benchmarking global carbon constraints across multiple financial drivers (as opposed to just one or two).

The individual drivers can be summarised into: Value resilience, Leverage resilience and Liquidity resilience to carbon-constrained scenarios. In summary:

• Ensure you use superior data analysis to produce a robust assessment of your company’s viability against global carbon constraint scenarios. It should give a clear view of whether the organisation is on track / how much work is needed to compete across varying scenarios.

• Utilise a consistent and accurate method across time periods, to benchmark progress against organisational goals and industry averages. 

• Know that digital reporting and integration will become increasingly important to meet the needs of business leaders, investors and regulators - creating a transparent, comparable, and accurate statement of record and analysis, and

• Look beyond a moment in time reporting. Any carbon transition analysis should be capable of identifying how to address any gaps in meeting climate targets, how to minimise loss from carbon risk and optimise financial opportunities. Anything less falls short.

We are set to see the momentum of the carbon transition only grow in 2022.

Michael Lebbon is a finance professional who moved into climate finance over 15 years ago. He is founder and CEO of Emmi and a CFA Charter-holder.