COVID-19 has demonstrated that businesses need to develop robust risk management strategies. But climate change and ensuing natural environmental disasters arguably pose even greater risks to business operations and supply chains, says Brendan O’Dwyer. He is a Professor in Accounting at Alliance Manchester Business School.
This week should have seen the start of Wimbledon. But unlike other sporting events that have had to cancel because of COVID-19, the All England Lawn Tennis Club had purchased pandemic insurance, making it one of the few sporting events prepared for such an event.
The management team had clearly undertaken scenario planning in their risk assessments and many businesses could learn from this approach, not only in terms of dealing with possible future pandemics but also in terms of other risks to their operations such as natural and environmental disasters caused by climate change.
Indeed, so far the majority of businesses across all sectors have struggled to incorporate scenario planning into their risk management processes and fully understand and report on these risks.
Financial reporting and climate change
Reporting on the potential impacts from climate change was actually a key recommendation back in 2017 from the Task Force on Climate Related Financial Disclosures (TCFD) which has developed voluntary, consistent climate-related financial risk disclosures for use by companies.
Previously sustainability reporting frameworks have mainly focused on reporting on the impacts on climate change from a corporation’s operations. The TCFD instead focuses on reporting the financial dependencies a corporation has based on different levels, or scenarios, of climate change. In short, TCFD has moved the conversation to one about risk to corporations in order to incentivise entities to commence taking climate change more seriously.
The TCFD says more than 1,000 global organisations have now declared their support for its recommendations with backing from corporations, national governments (including the UK), central banks, regulators, stock exchanges and credit rating agencies. Supporters include almost 500 financial firms responsible for assets of over $138tn, while private sector supporters include asset managers, asset owners, banks, and companies in industries such as chemicals, energy, insurance, metals and mining, oil and gas, and transportation.
But whilst the number of FTSE 100 companies addressing the TCFD in their annual reports has surged over the last year, there are considerable gaps in the reporting with many struggling to implement the recommendations around scenario analysis.
As such, this development phase of TCFD reporting is actually now a real opportunity for business and academia to collaborate, and in a new paper I have co-authored with Professor Jeffrey Unerman from Lancaster University Management School we’ve sets out some key areas where academic research can provide insights for practitioners and help with the evolution of richer reporting that can prompt greater corporate consideration of climate change.
In the paper we specifically outline a number of key themes and research areas where we believe further academic research and collaboration with practitioners could contribute towards realising the ground-breaking potential of this form of sustainability accounting in its early stages of development.
TCFD has the potential to revolutionise sustainability reporting and help not only companies, but governments and households, understand the very real but complex risks of climate change on business operations.
As we all know COVID-19 has had a devastating impact on the world economy, and lessons from the pandemic will now need to be integrated into the risk assessments and preparedness for challenges emanating from extreme weather events and natural disasters.
But this also provides a unique opportunity for interdisciplinary academic teams to work with practitioners to develop solutions and models so that climate risks can be fully integrated into corporate decision-making and reporting. Here at Alliance MBS we are also perfectly positioned to utilise our strengths and expertise across the disciplines to help businesses plan, report and prepare for the future. The Accounting and Finance division I am part of has a range of excellent academics who can contribute here.
What is also worth bearing in mind is that while enforcement of TCFD recommendations is currently voluntary, this may not be the case for much longer. For instance, here in the UK the government is already looking to make TCFD reporting mandatory.
This movement also chimes with the recent UK Business, Energy and Industrial Strategy (BEIS) Committee Inquiry into the Future of Audit which I advised on. One of the key proposals from that report was the need to redefine the concept of audit and expand the parameters for assurance in a world that will grow to rely on reporting such as TCFD for critical decision-making.
So the direction of travel is clear and, as COVID-19 shows us, there is no time to delay.