What is meant by climate risk disclosure for businesses?

The effects of the climate crisis are becoming increasingly pronounced. With this in mind, disclosure of climate risks is vital for business success and any comprehensive sustainability strategy. 

Failure to make a disclosure can result in asset losses, poor investment decisions, and the continuation of practices that only accelerate climate change. Below, we dive into everything you need to know about climate risk disclosures and how they can help businesses become more sustainable and engage in climate change mitigation.

About climate risk disclosure and climate transition risk

Climate risk disclosure refers to when businesses voluntarily share environmental risks or challenges they may face. These disclosures offer specific information for businesses on how environmental risks could influence environmental performance, revenue, or output. 

Depending on the sector, businesses may assess how threats such as rising sea levels or climate change will compromise their operations. Organisations use these disclosure documents to publish data and information concerning the carbon footprint of their activities and their exposures to climate risks. 

A climate disclosure could reveal how much carbon a company’s factories produce or how green its investments are. In the disclosure, a company also shares what it plans to do to counteract its impact and address risks. 

A climate risk disclosure can take several forms, from a website page to a report or other means of public communication. It’s becoming an increasingly vital step in maintaining a successful enterprise to disclose climate risks. Investors are keen to know how transitional or physical risks may influence an organisation’s bottom line. Suppliers and vendors must comprehend how risks could create supply chain issues or slow logistics. 

The 2023 EY Global Climate Risk Barometer indicates a significant gap between business strategy and an organization’s climate. While the majority agree to climate commitments, almost half (47 percent) of those surveyed do not disclose a transition plan to back these. 

To support this, 74 percent of respondent businesses do not include the quantitative effects of climate risk in their disclosures. This implies climate change is not being considered in the same way as other material impacts. It is reflective of a greater trend for climate strategy to remain separated from sustainability reporting. 

The different types of climate risks

Generally, physical risks are the more apparent climate-related risks. These risks refer to the economic ramifications of damage to supply chains, the built environment, and infrastructure. We’re witnessing increased weather disasters, extreme heat, water shortages and much more. 

Businesses will not be able to carry on as usual. To prepare for these physical risks, organisations need to carry out climate risk assessments. However, whilst larger corporations will be affected by physical risks to a certain extent, some geographies are more susceptible than others. 

Transition risks then refer to those related to the journey of transitioning from reliance on fossil fuels toward a low-carbon economy. Some examples of these transition risks could include carbon disclosure mandates, the implementation of a carbon tax, or the transition to renewable energy solutions. 

The oil and gas industry, for instance, is likely to face a significant transition risk, particularly as fossil fuels are phased out to achieve sustainability goals. Additionally, the automotive industry is prone to encounter transition risks as the world migrates to electric vehicles. 

The arrival of the SEC climate disclosure means large publicly traded companies will soon be mandated to assess their transition and physical risks. They will have to do this in line with how they assess and plan for other potential financial threats. This increases the transition risks for businesses under these jurisdictions. 

Benefits of climate risk disclosures

The number and frequency of climate-related risks continue to grow. If businesses want to ensure they are positioned to thrive in the long term, they need to prioritise climate risk disclosures. One of the most significant benefits of these disclosures is they help investors identify overall financial risk. 

This is especially the case if your company is subject to physical damage from the environmental crisis. Climate disclosure enables investors to easily comprehend how well your business accommodates the current regulations. Before an investor contributes financially to a company, they will want to understand all potential opportunities and risks. 

Within these disclosures, you will also be required to discuss opportunities your company can take advantage of because of climate-related risks. Shareholders are looking for investment opportunities whereby dividends grow over time. Companies could see a reallocation of funding towards companies with climate transparency if they do not offer sufficient disclosures.

Key takeaways

Climate risks are playing an ever-increasing role in our world today and climate change is already impacting society, the environment, and the economy. Climate risk disclosures allow businesses to comprehend and integrate climate opportunities while minimising risks into their business processes. Businesses that are proactive in creating transparent and robust climate management strategies can better position themselves to succeed in a climate-adjusted future.