Risk is risk: how climate is reshaping business
29 January 2020 - By Susanne Katus & Donato Calace
The penny has dropped about the climate emergency in business. At the World Economic Forum in Davos last week, climate change was top of the agenda with company chiefs and finance leaders rallying around Larry Fink’s, BlackRock’s CEO, proclamation that “climate risk is investment risk”.
As Fink writes his annual letter to CEO’s, “Companies, investors and governments must prepare for a significant reallocation of capital.” And climate risk is just the tip of the iceberg.
Growing consensus around the real business risks tied to climate change is shining a necessary, albeit delayed, floodlight on current enterprise risk management approaches to reveal their incompleteness. Other ESG risks, like human capital, are quickly surfacing from underwater, and companies need to get in control.
Risk is risk, and companies must acknowledge it
That’s why capital market leaders are demanding more meaningful disclosure from companies. This is not about transparency for transparency’s sake. It’s about companies demonstrating an awareness of and responsiveness to the changing external risk landscape.
Demands for more disclosure are nothing new (hello survey fatigue). What’s shifting - thanks in no small part to the impact of frameworks like the TCFD - is a growing focus on the processes that companies have in place to determine and monitor material ESG issues.
Eyes on materiality
We see this in policy and capital market developments worldwide, with materiality being front and center in defining corporate accountability. Both the usual suspects, like the European Commission (read here how DG FISMA is planning to review materiality requirements in the next version of the NFRD) , and the more unusual suspects, like the US Securities and Exchange Commission (SEC) and federal government, are getting involved.
For instance, the SEC is proposing to adopt a principles-based rule for human capital disclosure. Last year, we also saw the first ever US congressional hearing in the US.
CEO’s are also taking the lead. 140 company chiefs are supporting an effort to develop a core set of common metrics, as reflected in a proposal prepared by WEF and released this month.
These developments reflect the growing awareness that current external risk management and disclosure practices are incomplete.
There are various reasons to point to - the alphabet soup of standard setters, lack of quantifiable data, inconsistency in reporting practices - but at the core, it comes down to materiality.
The real purpose of materiality goes beyond reporting, though it’s often confined to a reporting exercise. If positioned correctly within the company, materiality is a business critical process to inform strategy setting and risk management; it has the power to connect the dots between sustainability, risk, finance and legal experts.
And if considered carefully in the investment process, the narrative around this process offers invaluable insight into company preparedness to address climate and other emerging risks.
Ultimately, both companies and investors need to step it up. “Yes, it’s complicated - so put more resources to it,” writes Carol Adams, Professor of Accounting at Durham Business School, in a recent FT article.
Walk the talk
Now that Davos is over, and the theme of stakeholder capitalism is set for 2020, the question remains: who will walk the talk this year?
We already see business leaders stepping it up:
- State Street’s CEO recently warned corporate boards that ESG “is no longer an option for long-term strategy,” reinforcing how the firm will use its proxy voting power to ensure companies are identifying material ESG issues and incorporating the implications into their strategy
Philips received reasonable assurance from the Big 4 Accounting Firm EY on its sustainability reporting process and data
- Nasdaq announced the launch of a new ESG Reporting Platform to simplify the corporate reporting process .
Everyone - company chiefs, finance leaders, stock exchanges, policy makers and technology and data providers - have a role to play. That’s why this year, we’re focusing on the theme of connection at Datamaran, collaborating with our global network of corporate clients and partners to accelerate progress.
We’ll report back on these developments in a webinar early March. Stay tuned for more details.
Global Insights Report: The Three Big Wake-Up Calls For Boards
The events of 2020 brought risks related to public health, climate change, and diversity, equity, and inclusion to the forefront of public consciousness. Yet, too many businesses are failing to incorporate external and ESG risks into their long-term strategies and to think about business model innovations to reorient towards long-term value creation.
Published jointly by Datamaran and The Conference Board, this Global Insights Report examines how some of the largest public companies reacted to the events of 2020 in their corporate reporting. It considers how senior executives and Boards can apply this knowledge in addressing other systemic and external risks.
Get your complimentary copy now and learn how to use real-time data to monitor the external risks landscape and stay on top of trends.