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Key updates and tips for climate change governance

CoP26 has generated a volley of major climate-related announcements and big reveals. Chief among these is the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board Prototype Climate-related Disclosure standard, and the UK government’s transition plan disclosure mandate, which come hot on the heels of New Zealand’s External Reporting Board (XRB) draft climate disclosure standards.

Where XRB’s draft standards focus heavily on the governance and processes, the IFRS’ standards are more exacting, requiring disclosers to unpack, analyse and disclose the impact of climate change on their future cash flows and their value, timing and certainty, over the short, medium and long term; as well as how climate change is impacting on overall enterprise value.

In this regard, the international climate-related disclosure standards demand a far more detailed level of disclosure and scenario analysis than those presented so far by the XRB. The point remains that IFRS are still a prototype and there may be changes between now and their official launch in mid-2022.

A separate ground-breaking announcement last week unveiled the UK’s decision to mandate all asset managers, regulated asset owners and listed companies to publish transition plans that support the UK’s net zero commitment. The transition plan disclosure standards will be in place by 2023 and are expected to be incorporated into the UK’s Sustainability Disclosure Requirements.

Closer to home, for mandated disclosers, Boards and executive management teams should be starting to assess their climate risk governance structures.

What does good look like?

Good climate governance means having clear lines of accountability and clear processes for communicating and managing climate risk.

Who owns climate risk management?

Everybody. From non-executive directors down to individual project managers and business owners, everyone in your organisation should understand their role and how they contribute to climate risk management and reporting.

The first step is for Boards to include climate risk as a standing item of their quarterly agenda. This sends a clear signal to management of the Board’s expectation for climate risk to be identified, understood, reported, and managed.

For executive management, climate risk should be a standing agenda item at its regular meetings.

Most organisations will have an organisational risk management framework in place, which maps the process of communication and ownership of risk. Ideally, you will embed climate risk management into your existing risk management process.

If your organisation does not have this in place, the first action is to establish a process for capturing climate risk, clear lines for reporting these risks up to the Board, and clearly defined accountability for managing climate risk.

The frequency and procedure for climate risk reporting to the Board is key – this ensures that the Board is fully appraised of emerging risks, timelines are set for undertaking risk assessments, and developing mitigation and adaptation options are clearly understood, and adhered to. It also provides the Board the opportunity to challenge and test the process to ensure it is robust. Ultimately, accountability sits with the Board – failure to adhere to the standards could result in fines up to $5 million for entities or up to $50,000 for individual directors, and up to five years imprisonment.

If your organisation doesn’t have a climate change policy in place, now is the time to start thinking about drafting one. Your policy should set out your expectation of all employees on all areas of climate risk management and accountability. It serves as a clear reference point and ideally will be supported by either standards and/or guidance which can inform the expected level of service or design specifications, setting the baseline for performance in the climate change context.

If your organisation hasn’t already carried out a climate risk assessment, then this will be the first topic to discuss on the climate risk agenda. The XRB requires disclosers to explain how they have accessed the appropriate level of climate change expertise, so you will need to consider whether to bring in external experts, and if so, who.

The second topic to discuss will be whether your organisation’s existing risk management system is capable of capturing climate risk, given the issues that arise with the chronic nature of climate risk, and the methodology and outputs of assessing climate risk. This will prove key to effective climate risk management - and we will explore this in close detail in next week’s instalment.

Until then, if you have any questions, please contact us directly.

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