Charting your ESG Path – Incorporating Climate into your enterprise risk management framework

Nick Goosen, Kristen Haines

16 February 2024

The purpose of the proposed upcoming Sustainability Reporting regime is to inform investors and the community at large what your organisation is doing about climate change. A significant piece of that will be reflecting how climate is incorporated into your enterprise risk management framework and how you are implementing changes to address climate-related risks.

We have previously discussed how to identify your climate related risks and opportunities and once they have been identified, it is important they are appropriately dealt with along side other business risks as well. It is not enough just to have identified those risks, you need to then consider how significant they are to your organisation and how you are going to manage those risks.

Analysing and prioritising your climate related risks

You may have initially identified a significant number of potential climate-related risks, therefore your first priority is to analyse and prioritise these risks. This should be done both within the context of the other climate-related risks and broader business risks as well. Analysing the risks should take into account both the probability of the event occurring and the severity of impact if it did occur. For example, you may be in a flood prone area so the risk of a flood occurring is highly likely, but because you have in place sufficient flood mitigation strategies already, the expected impact may not severe.

Analysing your risks in this way will help you identify which of your climate-related risks are material to your organisation and where you will need to focus your efforts on to mitigate and manage going forward.

Setting up strong governance structures around climate-related risks

Climate-related risk conversations are not something that should happen just in your risk management or finance team. It is something that requires discussion at a Board or Committee level. The Board needs to set the risk appetite and understand the implications for the broader business of the risks of climate change.

The first step in ensuring that climate is appropriately considered at the Board level is to update the Board and applicable Committee charters to ensure roles, responsibilities and accountabilities with regards to the climate related risks are clearly documented and understood. The Board or relevant Committee needs to take ownership of these risks and ensure that they are setting an appropriate tone and risk appetite for the organisation. To ensure that climate-related risks are appropriately considered at this level, it may be useful to include it as a standing agenda item for the relevant meetings, at least in the short-term, until it is better embedded in your culture and processes.

You may find that Directors are uncomfortable with taking ownership of this as they don’t feel confident in their understanding of the subject and thus not feel comfortable to take ownership and management of these risks. Therefore, it is important to provide sufficient training so that they have a better understanding of climate change and the associated risks. This will assist them in effectively fulfilling their responsibilities. If your organisation does have a number of material climate-related risks, the Board may wish to consider whether it is necessary for them to bring on an additional director with specific climate related expertise to help the Board work effectively.

Establishing policies and procedures

Once appropriate Governance structures have been established, it is essential to develop relevant climate-related risk management policies and procedures to address the specific risks and to showcase the Board and Committee members’ appetite towards climate related risks. It is essential that these new policies and procedures are comprehensive, roles and responsibilities are clearly defined and they are adequately implemented and easily available to all relevant internal and external stakeholders.
Look out for the next article in the series where we will delve into more detail about how to develop these strategies to address climate-related risks which will form the basis for these policies and procedures.

Embedding climate-related risks in the risk management process

It is important to remember that incorporating climate-related risks into the risk management framework is an ongoing process, and not a once off set and forget process merely done so that you can tick the box and state in your Sustainability Report that the risks have been considered. The risk landscape changes every day where both your exposure to and our knowledge of climate-related risks will change over time and and it is important to keep up to ensure risks are efficiently managed and reported. At the same time the technologies and solutions that will help you address these issues are also evolving at a fast pace which may change how you manage these risks. Therefore, it is important to ensure that it is well embedded in your organisations risk management framework and you continue to reassess your risks and responses on an ongoing basis.

If you would like to further information on how to incorporate climate risk into your enterprise risk management framework, please download the attached presentation. Alternatively, please speak to your local Moore Australia contact, to have a discussion around how to implement it in your organisation.