Climate Change Risk Management: what is it about and why it must be an urgent priority for companies

published on 15 November 2023 | reading time approx. 4 minutes

With the entry into force of the European Directive 2022/2464 (so-called CSRD) and the extension of the sustainability reporting obligation to large companies (including unlisted ones) risk management becomes crucial and must be carried out according to the principle of dual materiality and with a forward-looking approach.

But what does this mean in concrete terms? It means that companies are called upon to identify and manage, not only the risk-impact of their business on the environment and the population, but also the risk-impact of ESG factors on their business. This is the main goal of the double materiality: it involves identifying the main impacts of the company's activity on the outside within the ESG sphere and (vice versa) the main impacts of ESG factors on its own activity.

The forward-looking approach, on the other hand, means that (although the term 'balance sheet' makes one think of retrospective reporting) the company must look to the future, to probable and potential developments in the social, environmental and economic field, identify consequent risks and manage them, i.e. plan appropriate measures for their prevention and mitigation.

And climate change risks lend themselves better than others to exemplify these concepts in very concrete and direct terms.

Firstly, this summer and in recent days, a series of extreme weather events occurred, including exceptionally high temperatures, persistent drought, devastating floods, hailstorms, and tornadoes. These events affected Italy and the Mediterranean area, as well as, to an even greater extent, the United States and Asia, bringing vast areas of the territory to the knockout and impacting people and businesses. In these tragic moments, there is a unanimous chorus of protests for preventive interventions that were never carried out, and promises are repeated for the future of prevention politics and not of intervention always only afterwards, in emergencies, to repair the damage.

And exactly this is what the company is called upon to do to comply with the CSRD, to act primarily in prevention and only to a residual extent in compensation.

Specifically, it is necessary to:

identify risks, for example, the risk of high temperatures that can lead to energy supply disruptions and suspension of the working activity, as well as the risk of flooding events that can also affect facilities, communication routes, and the population, with consequent risks of serious damage to people, property, and business continuity itself;
prioritize risks by assessing the probability of the occurrence of the event and the magnitude of the consequences for the company -on the one hand- and for people and the environment (on the other hand) so as to assign each risk its own value in terms of severity;
identify, plan and implement appropriate (depending on the degree of severity of the risk) measures to prevent and mitigate the risk and its impacts.

This is what 'risk management' basically consists of and what is required not only by the new European legislation, but also and above all by the current social-environmental context, to ensure the sustainability (and sometimes even the survival) of the company.

An adequate climate change risk management policy is therefore essential for a proper risk management practice.

Following an assessment, i.e. an analysis of the organizational context (which -it is worth remembering- is not limited to the company perimeter, but is extended to the entire supply chain and to the main stakeholders), an initial 'materiality' analysis of the risks has to be carried out (assessing, as mentioned, their seriousness), specific KPIs must be identified to measure their impacts (going back to the previous examples, these can be measured in terms of days of interruption to production or suspension of working activity, days of interruption to supplies, delays in deliveries, etc.) to then outline the steps, measures and interventions that the organization will undertake to prevent and mitigate these risks-impacts, in order to develop a solid capacity to manage climate change risks.

By implementing the policy, disseminating it, providing adequate training, and monitoring its correct implementation, the organization can effectively manage and reduce risks. This not only enhances resilience but also fosters innovation, ensuring in the mid-long term sustainable growth and increased competitiveness.