Is climate change included in an organization’s environmental, social and governance (ESG) strategy? How about its overall risk management process? The Institute of Management Accountants (IMA) with the New Jersey Society of CPAs (NJCPA) as research contributor, has launched a new survey to understand how accountants and corporate finance professionals are responding to exposures related to climate change and the challenges that they face. You can help, too — take a few minutes to complete the survey by Oct. 14.
Why it Matters
Stakeholders are driving businesses to consider and disclose the risks that climate change poses to their organizations. Despite demands for enhanced disclosure, many companies are contemplating these risks for the first time. Global companies are beginning to implement the 11-point recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which were developed pursuant to the direction of the global Financial Stability Board, and now the Climate Disclosure Standards Board continues the mission of adoption. In his annual CEO letters for 2020 and 2021, Larry Fink, CEO of Blackrock, the world’s largest asset manager, made waves by announcing to the market that all investments would be screened for management and disclosure around sustainable business issues and, more specifically, climate change. In addition, the election of President Biden, along with new cabinet-level appointees and executive branch administrators, brings renewed attention in the United States, including the Securities & Exchange Commission.
What it Means
By way of background, climate change is generally categorized into the following three buckets:
- Physical risks relate to damage and interruptions from short-term weather events (such as hurricanes, floods and wildfires) and longer-term climate trends (such as water depletion, soil depletion and temperature extremes) that make it unsafe for humans to work productively.
- Transition risk, which includes stranded asset risk, reflects the impairment of operations and assets as the economy shifts to respond to slow or avoid the consequences of extreme weather changes.
- Liability risk reflects demands by stakeholders for reimbursement for harms they claim resulted from a business’s action or inaction.Importantly, innovative business leaders look at transition risks as opportunities for rethinking business models.
Many CFOs and chief risk officers regularly refer to the Committee of Sponsoring Organizations (COSO) Enterprise Risk Management (ERM) Framework or similar models to identify, assess and manage risks within their organizations. These guidelines are applicable to climate-related risks and how to consider the costs of carbon to our economy and our businesses. Applying these specific guidelines can enable organizations not only to identify the negative risks around climate change but also, more importantly, to use their analysis to facilitate innovation, strategy and business models with long-term resilience and viability.
This study follows from IMA’s “CFO as Value Creator” series that addresses sustainable business information and management for its constituents in corporate accounting and finance. IMA’s C-Suite report, CFO as Value Creator, Finance Function Partnering for the Integration of Sustainability in Business, and related self-study CPE course, provide a framework for accounting and finance professionals to work collaboratively with other organizational functions, enterprise-wide, to make meaningful, strategic decisions and enhance business sustainability.