Taking a Proactive Approach to Managing Climate Crisis
Published on 31 March 2020
Coronavirus and Climate Crisis
A blow from increased novel coronavirus fears sent both the financial market and stability into freefall. With the outbreak of the COVID-19 pandemic, daily necessities are becoming scarce because of the fear of supply chain disruptions. We now confront a key question: Is this the new market trend? Understandably, these extraordinary events have grabbed global attention. Yet the trickle of concerning climate risks shall not be slowed. The Swedish activist Greta Thunberg urged people to fight the climate crisis and pandemic simultaneously while others suggested that the world should react to climate crisis like it is reacting to the virus with a similar sense of urgency. We are learning through the coronavirus the importance of individual responsibility, local government action and international cooperation to impose the suspension of business as usual.
Transformation
The evolving risks landscape switched from economic stability to climate threats and accelerated biodiversity loss. The World Economic Forum (WEF) has published the Global Risks Report early this year and the results of their Global Risks Perception identified environmental and climate change-related concerns as the top five risks in terms of likelihood. It was the first time in the history of survey that one category ranked all five of the top spots. Topping the list was extreme weather, followed by climate action failure, natural disasters, biodiversity loss, and human-made environmental disasters. Similar to the top risks in terms of impact, four out of five were environmental where climate action failure replaced weapons of mass destruction as the top risk. Comparing the period 2007 to 2010, economic risks were in more dominant positions by likelihood and impact. This transformation has led to rapid changes in government policy direction, customer preference, and investor engagement and diversification in response to the implication of climate change, and therefore a market trend to business. In March 2020, the technical expert group in the Europe Commission issued final recommendations on the EU Sustainable Finance Taxonomy which helps investors understand if an economic activity can fulfill Europe’s climate goals.
Managing the Trend
Companies shall be more proactive in managing these trends. Considering the interconnections between the global risks, an exaggeration of one can possibly lead to an acceleration of the other. The Stock Exchange of Hong Kong Limited (Exchange) has recently launched training and guidance materials to assist issuers in understanding climate-related risks and support the board and directors in managing relevant risks. Knowing that its impacts present financial risks to most sectors, it is essential to disclose any climate-related risks, impacts, and mitigation measures. With reference to the recommendation of the Task Force on Climate-related Financial Disclosures (TCFD), physical risks and transition risks are the two primary types of climate-related risks. The Exchange suggested the following steps for directors in managing climate-related risks.
Gain the support of the board of directors and executive leadership team
Integrate climate-related issues into the governance process to enhance board-level oversight
Collaborate with sustainability, operations, finance, compliance and investor relations colleagues to respective roles
Get feedback from stakeholders about their views on climate-related risks and opportunities
Discuss climate-related issues with the board
Discuss with the board on how the climate-related issues affect overall strategy and risk management
Companies shall illustrate how the potential risks relate to revenues, expenditures, assets, liabilities and financial capital as investors focus on the financial impacts of climate change. In the real estate section, examples of financial impact include rising operational costs from damage to properties and repairing costs, higher insurance costs, property devaluation, and even complete loss of the properties. To further manage the risks, companies shall take account of climate-related risks into existing risk management processes. By considering its risks as part of the risk management, business units shall have sufficient awareness of the risks they face when identifying the risks and escalating them to the board. More importantly, business shall adopt a proactive approach rather than reactive towards climate emergencies.
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