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Climate reporting: How to use climate disclosure for competitive advantage

By John Merkovsky , Torolf Hamm , Julien Hornacek , Grace Youell and Moiz Bohra | December 18, 2023

What can your organization learn from others already harnessing climate risk disclosure for business opportunity?
Climate|Medioambiental|ESG and Sustainability|Risk & Analytics|Risk Management Consulting
Climate Risk and Resilience|ESG In Sight|Economic Challenges

Can you reframe rapidly evolving climate reporting requirements as a means of uncovering improved resilience and growth? WTW experts showed exactly how in a recent Outsmarting Uncertainty webinar by calling on the experiences of companies already going beyond compliance to harness climate risk disclosure for strategic advantage.

The session focused first on understanding various reporting requirements, identifying where different regimes, such as Task Force on Climate-related Financial Disclosures (TCFD) and International Sustainability Standards Board (ISSB) overlap and diverge – a topic explored in WTW’s recently updated Climate Reporting Comparative Table. Specialists then focused on how businesses can learn from others leveraging their climate risk reporting requirements to uncover smarter ways to identify, quantify and manage climate risks.

In this insight, we summarize actionable perspectives from the session on how to:

  • Use climate disclosure to identify material risks
  • Quantify climate risk to support compliance and resilience
  • Integrate climate disclosures into risk management and strategic planning.

How to use climate disclosure to identify material risks

Large organizations, even those with hundreds of sites and suppliers, can effectively identify the climate risks most important to their long-term resilience and profitability while meeting their climate disclosure requirements. WTW recently worked with a European manufacturing company with annual revenues around €5 billion that did just this.

The organization already had a good understanding of its existing natural hazard exposures but needed deeper insight on how climate change could influence these. It also wanted to know how climate change would impact its business by identifying priority risks. As the organization is a listed company within the EU, it could align this risk assessment exercise with its obligations under EU Taxonomy requirements, while also considering emerging Corporate Sustainability Reporting Directive (CSRD) requirements.

Central to the organization meeting its climate disclosure obligations while planning for increased resilience of its global network of assets was devising a financial materiality-based approach. According to CSRD, “This [financial materiality] is the case when a sustainability matter generates or may generate risks or opportunities that have a material influence or could reasonably be expected to have a material influence on the undertaking’s development, financial position, financial performance, cash flows, access to finance or cost of capital over the short, medium or long term.”

WTW worked with the business to identify the most material climate-related risks across multiple sites, revealing the critical exposures. The resulting physical climate risk assessment study generated portfolio overviews, heatmaps and climate scorecards on the key material risks, outputs that both met the expectations of climate disclosure regimes, as well as those of internal stakeholders, investors and shareholders keen for assurance on how adequately the business was grasping the future impact of climate.

How to quantify climate risk to support compliance and resilience

To effectively manage any kind of risk (and climate in particular), you need to break it down into manageable risks you can then quantify. Climate disclosure requirements are increasingly requiring businesses to financially quantify climate risks, insight you can then use to put numbers against how climate-related risks are impacting your revenues, costs, and assets.

To give one example, we’ve worked an organization that quantified transition risk using robust modeling techniques that translated transition risk into the difference on future cashflows between different scenarios, over short, medium and long-term time horizons. The organization quantified both downside risks and upside opportunities relating to transition risk, both of which are quantifiable in terms of revenues, costs and investment needs. This quantification included the amount of potentially stranded assets, which can in turn contribute to estimated profits or cash flows at-risk from transition.

Using modelling techniques recognized by finance – as the example organization did when it used methods finance teams were already adopting for equity valuation and future cash flow modelling – can make it easier for your organization to integrate analysis outputs into its financial decision-making tools.

For each asset or business line, you, like the example business, could also model how transition risk could affect different costs, such as energy, raw materials, labor, capital investments, taxes and carbon cost; recognizing how the carbon cost is only one of many costs which may only play a minor role in the overall financial performance.

For the organization we worked with, the modelling revealed the greatest transition risk to its financial position was the potential impact on revenues as demand for its products changed in light of market and regulatory changes and as prices for conventional and low-carbon versions of its products evolved. We also modeled the capital expenditure needed to replace emissions-intensive activities with low-carbon alternatives and the resulting amount of stranded assets, doing so in line with CSRD requirements.

Finally, we worked together to select five global assets critical for the business and quantified the financial impact of the transition at this asset-level, before scaling up the impact to the business segment and corporate level. Exercises such as these clearly connect the risk quantification demanded by climate disclosure to creating analytical insight that enables smarter ways to manage climate risk into the future.

How to integrate climate disclosure into risk management and strategic planning

Converting quantified climate risk into business impact moves climate risk disclosure from being solely a compliance exercise into the realm of strategic opportunity, enabling risk professionals to speak the language of finance and treasury.

We’ve already seen organization use the same risk analytics methodologies to quantify climate risks for disclosure purposes to identify strategic options, quantifying the financial impact of alternative pathways such as divestments, portfolio optimization and investments that might mitigate climate transition risks while also preserving current value. We’re also seeing organizations use physical climate risk assessments required by climate disclosure requirements to define adaptation and mitigation plans and inform wider strategy, deploying climate diagnostic analytical models to select new sites and inform expansion projects.

We’re increasingly seeing how climate disclosure can represent an opportunity to both minimize and consolidate efforts around climate-related risk reporting and integrate insight on identifying and quantifying climate into risk management and broader strategic planning processes, driving long-term profitability.

Moving from a compliance to a strategic stance on climate reporting will also help your business pre-empt further development in climate and wider ESG disclosure. If your mindset is about going beyond box-ticking disclosure, using quantitative and analytical tools and techniques to identify, quantify and manage the biggest risks from a warming world transitioning to a low-carbon economy, you will be better-prepared to act on the many opportunities.

For smarter ways to respond to climate risk and reporting, get in touch with WTW experts.

For more practical insight on using risk analytics for competitive advantages, head to our Outsmarting Uncertainty webinar hub.

Disclaimer

WTW offers insurance-related services through its appropriately licensed and authorised companies in each country in WTW operates. For further authorisation and regulatory details about our WTW legal entities, operating in your country, please refer to our WTW website. It is a regulatory requirement for us to consider our local licensing requirements.

Authors

Head of Risk & Analytics and Global Large Account Strategy, WTW

Senior Director
Physical Risks, Climate Practice
Risk & Analytics

Enterprise Risk Management & Climate Transition, Risk & Analytics Director Europe

Senior Associate, Climate Practice
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Associate Director - Climate Transition Analytics
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