By Torolf HammSenior Director, Physical Climate Risk Climate Practice, WTW
If your sustainability colleagues are leading efforts on physical climate risk or resilience planning, now’s the time for risk functions, which are already likely to be looking at topics such as property damage and business interruption risks, to step forward.
Rather than becoming operational executors of resilience strategies, risk teams can be strategic co-leaders in shaping your organization’s climate and environmental, social and governance (ESG) strategies.
Below, we explore exactly how your risk function can remain central to the climate conversation and contribute meaningfully to your organization’s climate and ESG strategy. We cover:
Why are sustainability functions overlapping with traditional risk management?Why do risk professionals need to collaborate with sustainability on climate disclosures?How can risk functions use regulation to influence climate resilience and strategy?How can risk functions use analytics and scenario modeling to shape climate resilience?How can risk functions become sustainability and climate resilience strategy influencers and leaders?
Why are sustainability functions overlapping with traditional risk management?
Sustainability teams are increasingly being tasked to assess physical risks as part of climate disclosure, including topics such as windstorm and flood risk. They’re also being brought into building adaptation strategies, crisis management and emergency response planning to address climate change. Such areas often intersect with property damage and business interruption (PDBI) insurance, which traditionally sit within the risk domain. This overlap presents an opportunity but also a risk for risk functions if they’re not yet sufficiently involved.
Why do risk professionals need to collaborate with sustainability on climate disclosures?
Climate disclosures standards, such as the International Financial Reporting Standards (IFRS), require financial risk quantification of climate risks.
When non-risk professionals lead these efforts, there’s a possibility risks might be misrepresented or misinterpreted, particularly in the context of insurable perils. This could expose your organization to financial and/or reputational harm if, for example, the risks disclosed in your annual and sustainability reports are under or overstated.
Here, risk functions can bring analytical rigor and insurance market-recognized methodologies to ensure your climate risks are properly evaluated. Your involvement can both safeguard the integrity of your organization’s disclosures and support more informed decision making.
How can risk functions use regulation to influence climate resilience and strategy?
To have greater influence on climate resilience and strategy, risk professionals can begin by engaging with sustainability colleagues and deepening your understanding of climate risk frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD), which underpin many global disclosure regimes and therefore offer a shared language for collaboration.
When supporting climate disclosure exercises, you can add value by constructively challenging modeling assumptions and contributing analytical insights. This proactive approach ensures risk perspectives are embedded in strategic planning and helps secure the resources needed to manage climate risks effectively.
How can risk functions use analytics and scenario modeling to shape climate resilience?
Advanced analytics and scenario modeling are powerful tools for risk functions and your sustainability colleagues. These techniques enable you to quantify climate risks and communicate their potential impact in terms that resonate with boards and investors.
Scenario testing can reveal asset-level vulnerabilities and guide resource allocation, helping your organization better anticipate and mitigate climate risks, strengthening resilience.
Scenario testing can reveal asset-level vulnerabilities and guide resource allocation, helping your organization better anticipate and mitigate climate risks, strengthening resilience.
How can risk functions become sustainability and climate resilience strategy influencers and leaders?
As organizations shift from reactive recovery from climate and natural catastrophe risks to proactive resilience strategy, risk functions are well-positioned to lead. You can act as a connector across departments alongside your sustainability functions, offering a data and subject-matter expertise-driven approach that embeds risk awareness into your organization’s decision making.
With robust analytics and a clear understanding of climate and in the wider-context ESG risks, your risk function can help shape strategies that deliver long-term value, protect the business and guide it with greater confidence through the transition to a more sustainable future.
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