Mandatory climate reporting pillars: Governance and Strategy

Previously, we’ve discussed the RSM study that assessed Australian companies' readiness for mandatory climate reporting.

In this blog post let’s delve into the first two of four fundamental pillars of climate reporting: Governance and Strategy.

The following is an extract from our recent webinar, you can always watch the full recording here.

Governance

Organisations will need to disclose how their governance processes integrate climate risk. How does the board understand what's happening with climate, risk and opportunities in the business? Is there a process by which this information flows from operations through to management and through to the governance body? So, you need to put in place proper processes and procedures that report the information that's contained within the next 3 pillars up to that governance body.

Strategy

Strategy is the most complicated pillar. The strategy pillar is all about disclosing publicly how climate related risks and opportunities fit into your business strategy and how they might impact it. This means understanding the impact on access to capital, access to finance, and also revenue flows over the short, medium and long term.

And those words - short, medium and long term - are the really terrifying bit for anyone who's in a business and thinking about this, because we can all understand what's happening in our business in the next 12 months to 2 years, to 3 years, particularly from revenue and production.

Effects of climate-related risks and opportunities

So, if you have a current 5-year business strategy, or whatever the timeline it is that you've set, you need to go back and have a look at that and understand if 5 years from now there's increasing floods and fires where you're trying to operate, or if there's increasing days over 37 and a half degrees and you can't do road construction during those temperatures. It may impact your ability to deliver projects on time. It may impact your revenue flows.

We need to understand what's happening from that strategy perspective and those forward-looking projections that you've made in terms of where the business is going to be, how do you expect climate to interact with those.

The next one is decision making, which is quite heavily embedded in that strategic planning perspective. It's trying to understand if you have any kind of points that are highlights in the organisation where you go “if this happens with the climate, we change our strategy” or “if something else happens, we need to alter our operations or alter our business structure in order to account for those changes”.

And business model and value chain also come back to that understanding your supply chain and understanding the impacts on your supply chain. If you're heavily reliant on having shipping come from China to Australia that's regular, and you start to get more cyclones and more challenging weather and those shipping times start to push out, it may impact your ability to deliver products and services into the Australian market.

And the last one is the cash flows and financial performance, which is probably the most challenging aspect of this is [that] these reporting requirements are asking you not just to understand what's happening with the climate in the future and how that interacts with the strategy, but how much as a dollar figure that might impact your business.

While qualitative assessment is the initial step, eventually, financial modelling of climate impacts will be expected to understand the quantitative impact on your business.

Integrating climate considerations into strategic planning

You need to understand what the risks and opportunities are that could be reasonably expected to affect your company's prospects, what could happen in the future, understand the business model and value chain and the effects of those on how you are making decisions.

This is about understanding the tipping points in your business, and at what point climate change is going to materially impact the way that you operate your business. And for entities that are in maybe services industries, this is less of a factor. But if you are in the utilities industry, the mining industry, the construction, or the real estate industry, they start to become very real because you're interacting with land-based things on a daily basis.

If you're operating a mine, you're entirely reliant on being able to operate in a climate that is functional. As I mentioned, if you're building roads and constructing buildings, there're points at which it becomes too hot to even work, and then you may have additional down days, just as a result of climate change.

Measuring impacts over various time horizons

The first step in climate scenario analysis involves assessing climate-related risks and opportunities arising from physical and transition activities over the next decade. This assessment helps determine which potential impacts are material to your business.

If you're operating in a place that is completely flood free and has never had a flood ever, then future modelling of floods is probably not something that you need to waste your time doing but heat may be a major factor for you.

From there you need to look at a range of scenarios. And when I say scenarios, there's a lot of different modelling out there that assesses what could happen with different regulatory and transition activities as we transition to a low carbon future. And those different scenarios focus on different risks, and it can help you understand what that might mean for your business.

And then you evaluate the business impact. So, once you have that list of defined scenarios that you're using, you can plug those into your modelling and have a look at what that might mean from a dollar value if you're at that stage, or even just look from a qualitative perspective around how that's going to play out for your business.

And then the best bit is you get to look at what you can do to mitigate that - if you do come up with an enormous risk, you know there's so few risks out there that can't be mitigated to some degree by proper business planning. And this is the true value of climate scenario analysis, is it's not just a regulatory exercise. This is a really valuable business tool for understanding how you can have a more resilient business, and how you can perform better in the future.

You have this excellent opportunity to understand the inner workings of your business like never before.

Previously we focussed so heavily on production variables and on financial variables, but this is just a whole new way of understanding how those risks into play with your business, and you may find that with some tweaks to your business that you can actually be maybe a market leader in 5 years' time if other businesses in your industry are not adapting as well as you are to these changes.

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Stay tuned for the next part of the series, where Sarah will walk us through the final two climate reporting pillars, Risk management and Metrics & targets.

Or watch the full webinar here.