Climate and Environmental Risk

Financial institutions and corporate organisations are exposed to climate-related and environmental risks. Climate related physical risks are a result of the irreversible and far-reaching changes to the climate system, leading to extreme weather events. At the same time, the transition to a low-carbon economy also results in transition risks for organisations. Next to climate related risks, organisations can be exposed to environmental risks resulting from a decline in the quality and abundance of nature due to for example land use change, natural resource use and pollution. In addition, governments can take protective measures (e.g. nitrogen restrictions) which impact the operations of organisations.  

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The objective of climate risk modelling is to assess the impact of climate change on business models, sectors and organizations under different scenarios. Climate risk modelling allows organizations to  quantify potential risk and opportunities stemming from climate risk. Central banks, supervisors and society are increasingly demanding organisations to quantify climate risk. The results of climate risk modelling enable organisations to identify and mitigate the impacts that climate change will have on their business.

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The objective of climate scenario analysis and stress testing is to assess the impact of climate related risks on an organisation’s business under different climate scenarios. The results enable organisations to identify the main climate related risks they are exposed to, as well as mitigating actions which enable them to better respond to the threat posed by climate related risks. Scenario analysis is widely used by organisations and also recommended by the Task Force on Climate-related Financial Disclosures (TCFD) as an important tool. 

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Sustainability considerations are beginning to be genuinely embedded in every organisation’s strategy. This shift has already started to fundamentally transform business models. This strategic shift is gaining broad traction requiring data of its own to substantiate (commercial) decision making by means of Key Performance Indicators (KPIs). Societal expectations, strategic considerations and regulatory requirements are evolving continuously and will continue to do so at ever increased velocity. This results in new data needs and changing ways in which to process and manage data. The question is: how to keep up in this environment and implement these rapidly evolving requirements? 

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Deloitte supports organisations in navigating through the evolving global disclosure landscape. With new regulations and standards constantly being updated or introduced, the pressure for climate risk disclosures on organisations is increasing. The Financial Stability Board (“FSB”) introduced the Taskforce of Climate-related Financial Disclosures (“TCFD”) as a response to the demand for greater transparency on climate risks. The TCFD can be seen as a strategic risk management framework for climate risk and can feed into sustainability disclosures. Most importantly, it can be used as a tool to understand and integrate climate risk and opportunities into business processes.

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