Climate Risk Strategy: How companies can leverage the ISSB and TCFD for guidance

Climate Risk Strategy: How companies can leverage the ISSB and TCFD for guidance

What is your strategy for futureproofing your business from the risks of climate change?

Companies that successfully discover the answers will be better positioned to adapt to the many ways that climate change risk is altering global markets, financing sources, and customer preferences. It’s a question that’s relatively straightforward. But for business leaders under pressure from investors, regulators and other important stakeholders, the answers can prove elusive.

For companies across the globe, developing a climate risk strategy is transitioning from a “nice to have” to a strategic consideration in business risk planning. Climate change risk assessment is a similar process to any other enterprise risk assessment that a company may conduct. Many companies have incorporated climate change risk into their existing enterprise risk management systems (ERMs). However, what resultant risk adaptation strategies look like after risk assessments have been conducted are different across companies and industries. Factors such as geography, market positioning, and scale can all impact how a company may evaluate and manage these risks moving forward. For example, an automotive company may develop and produce new electric vehicles to adapt to evolving customer demand; a food company may re-source ingredients in its supply chain if certain regions of the globe are becoming too dry for food production; or a cell phone tower manufacturer may use reinforced steel for towers in areas of the world prone to increasingly dangerous storm risks.

The ISSB (International Sustainability Standards Board), and the TCFD (Task Force on Climate-Related Financial Disclosures), provide guidance for companies to help develop customized climate risk strategies, one of several criteria sections found within both frameworks. Although specific strategies must be customized to the particular business model of each company, these frameworks provide important instructions for key inclusions in the climate strategy. According to the ISSB, when thinking through strategy development:

• Companies need to provide information that details a response to climate-related risks and opportunities. That includes how the company plans to achieve any climate-related targets it has set and any targets it is required to meet by law or regulation.

• Companies must anticipate any changes to their business model, including resource allocation, to address climate-related risks and opportunities. Considerations include plans to manage or decommission carbon-, energy- or water-intensive operations; resource re-allocations resulting from demand or supply-chain changes; resource re-allocations arising from business development through capital expenditure or additional expenditure on research and development; and management plans for acquisitions or divestments.

• Companies must focus on direct mitigation and adaptation efforts; for example, they can consider changes in production processes or equipment, relocation of facilities, workforce adjustments, supply chain resiliency efforts, or changes in product specifications.

• Companies should disclose any climate-related transition plans, including information about key assumptions used in developing its transition plan, and dependencies on which the transition plan relies.

• How the company plans to achieve any climate-related targets, including any greenhouse gas (GHG) emissions targets.

When thinking through how these approaches to strategy development may unfold for any particular company, there are key subject areas to evaluate. The TCFD climate reporting framework provides guidance on where companies can start, and where to look first.

Resource Efficiency:

• Companies can achieve direct cost savings in the medium to long term by enhancing resource efficiency across various processes like production, distribution, buildings, machinery, transport, materials, water, and waste management. ​

• Technological innovation plays a key role in facilitating this transition, enabling the development of efficient solutions such as heating systems, circular economy practices, LED lighting, industrial motor technology, geothermal power, and water treatment solutions. ​

Energy Sourcing:

• Organizations can benefit from low emission energy sources like wind, solar,, biofuels, and carbon capture and storage. ​

• The increasing trend towards decentralized clean energy sources, coupled with declining costs and improved storage capabilities, presents significant opportunities for companies to shift towards these sources and potentially reduce annual energy costs. ​

Products and Services: ​

• Innovation in developing new low-emission products and services can enhance a company's competitive position and cater to changing consumer preferences. ​

• Companies may highlight the low carbon footprint of their products in marketing, especially in sectors like manufacturing, travel, food, beverage, mobility, fashion, and recycling and environmental services, promoting energy-efficient measures throughout the supply chain. ​

Market-Based Opportunities:

• Companies can explore diversifying their activities to align with the transition to a lower-carbon economy, collaborating with various stakeholders like governments, development banks, local entrepreneurs, and community groups. ​

• Opportunities exist in areas such as green bonds, infrastructure for low-emission energy production, energy efficiency, grid connectivity, and transport networks, enabling companies to position themselves strategically for the future. ​

Resiliency:

• Companies can enhance the ability to respond to climate change events and manage associated risks by building resiliency into their business models. ​

• This is particularly important for companies with long-term assets, extensive supply chains, and dependencies on utility and infrastructure networks or natural resources, as well as those requiring long-term financing and investment to adapt to changing climate conditions. ​

Developing a climate risk strategy can be daunting. Companies must think through what factors are most material and must anticipate events that might be new and even unpredictable. But these challenges can be overcome. At Aeterra, we have both the in-house resources and expertise to help our clients navigate this landscape. We help our clients develop a cohesive strategy for identifying their emissions sources and futureproofing their businesses.