Managing Climate Change For India Inc.
An integrated Climate Risk Management Survey for India can help us understand and evaluate the risks posed by climate change
Hersh Shah and Rushva Parihar
If there is one lesson we can take away from the current pandemic, it is the scale of impact that a worldwide event can create. But are we any better prepared to manage global risks like climate change?
While a global pandemic was not even in the top 10 risks identified by the World Economic Forum Global Risk Report 2020, the same report indicates that the top 5 global risks were all climate-related. This makes climate change not just a potential risk, but a stark reality. In fact, the Red Cross deemed climate change a bigger risk than COVID-19, with more than 100 disasters reported worldwide, impacting over 50 million people, since the World Health Organisation (WHO) declared the pandemic a year ago. In terms of long-term impact, climate change will take a greater toll on humans than COVID-19. The WHO estimates the number of fatalities from air pollution alone to be 7 million each year, around twice the number of COVID-19 deaths till date.
Risks Presented by Climate Change
When we think about climate change, there are two major types of risk for us to consider and note - our impact on the planet, and the impact the climate has on us.
To add more complexity, these two perspectives are often interrelated, particularly in the long-term. When we talk about enterprises, they have to consider climate change risk from both these perspectives. Other than reputation and liability risk, the bigger challenge here will be transition risk - the risk that will arise as we transition to a low-carbon economy. Enterprises also have to evaluate their exposure to the impact the changing climate has on them in terms of physical risks, such as weather-related events.
We must begin by understanding the immediate and long-term challenges faced by Indian businesses. An integrated Climate Risk Management Survey for India can help us understand and evaluate the risks posed by climate change. It can also help us create India-specific capabilities to help manage and mitigate these risks. Climate change-related risks are long-term and complex, which means that we need more data and transparency to manage the short-term implications and risks.
Compliance with ESG Regulations
As a regulatory mechanism, ESG (or Environmental, Social and Governance) has emerged as one of the means by which authorities can enforce climate risk management. For instance, EU directives on non-financial disclosures require certain kind of organisations to include ESG-related issues. In India, SEBI issued ESG-based disclosures for the first time in 2020, through BRSR (Business Responsibility and Sustainability Reporting). The proposal intends for BRSR to apply to the top 1,000 listed companies by market cap, and makes reporting voluntary for the financial year 2020-21 and mandatory thereafter.
With the growing importance of ESG compliance, we must ensure that it is incorporated in ERM frameworks. This can be challenging, as non-financial corporate reporting is often fragmented and complex. However, there are globally-established metrics and platforms which business can use, such as the Reporting Exchange launched by the World Business Council for Sustainable Development or the set of disclosures drafted by the World Economic Forum.
The Way Ahead
It is important to understand that time is of essence in climate risk management, and that businesses must take immediate steps to address these issues:
- Create a well-defined ESG reporting protocol and fix accountability
- Carry out ESG audits to understand blind spots
- Align ESG with ERM policies
- Include climate change in risk scenario planning
- Make climate change an integral part of the board agenda, by incorporating it into organisation-wide policies and initiatives
- Deepen bench strength with climate change risk and sustainability experts
There is a pressing need for organisations across industries to develop forums and platforms where risk specialists can come together and exchange ideas, in order to stimulate research and devise climate change risk management best practices and solutions. Additionally, while the subject is already addressed in certain risk management qualifications, it also needs to be incorporated into business management and other courses, to help students and young professionals to understand the perils of climate change and align ESG policies with their company’s risk appetite.
Along with the necessity of acting in a time-bound manner, businesses must build resilience by mitigating the potential repercussions of climate change. We know that climate-related risks are novel, non-linear, and their magnitudes can be exceptional. Additionally, we also know that these risks are long-term, which makes the probability unreliable. Taking a proactive climate risk management approach will not only help us manage those uncertainties, but may also create new opportunities for growth.
Hersh Shah, CEO, Institute of Risk Management-India Affiliate and
Rushva Parihar, Sustainability Coach & SDG Expert