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Climate change risks need new risk management approach: Experts

Climate change risk management

BERLIN — Climate change imposes significant economic costs, and risk managers should adapt their processes to improve their organizations’ resilience to climate-related risks, a panel of experts said.

Traditional risk management strategies don’t fully address the broad and long-term threats of a changing climate, but they can be adjusted to better cope with the problems that arise from rising temperatures, they said.

Direct economic costs in Europe from climate change are already in the tens of billions of euros, “and projections show that they will reach hundreds of billions by midcentury if we do not significantly improve resilience,” said Yvon Slingenberg, director of the Brussels-based European Commission’s Directorate-General for Climate Action.

She was speaking during a session of the Federation of European Risk Management Associations’ biennial forum Tuesday in Berlin.

Companies in Europe have been disclosing information on their environmental, social and governance risks since the late 1990s, but it has led to an emphasis on reporting the issues rather than addressing the underlying problems, said Rodney Irwin, managing director of redefining value and education at the World Business Council for Sustainable Development in Geneva.

“The data that is being disclosed by many companies is not being used for internal decision-making, and that is where we have problem,” he said.

In addition, companies have used risk assessment frameworks that focus on their internal operations rather than considering the environment in which they operate, Mr. Irwin said. The Committee of Sponsoring Organizations of the Treadway Commission, or COSO, framework, however, has been revised and now considers context, strategy and culture in assessing environmental, social and corporate governance risks, he noted.

“Sustainability needs to be the dog that wags the tail, and reporting becomes the thing you do that’s a byproduct of your sustainable journey,” Mr. Irwin said.

And decisions on environmental impact need to consider the people that will be affected, he said. For example, the decision to stop mining coal in a region can have a devastating effect on the local community that relies on the mine for work, he said.

“We need to look more at vulnerability, we need to look at connectivity, we need to be looking at speed of onset of these risks, because that’s the only way we’ll get to a world of resilience,” Mr. Irwin said.

Enterprise risk management techniques can be used to address climate change risks and promote sustainability, said Valentina Paduano, chief risk officer and sustainability director for Sogefi SpA, an automotive parts manufacturer in Milan.

“ESG risk should be considered just a new category for a risk model,” in the same way that companies consider compliance risks, strategic risks and financial risk, she said.

The ERM process, which usually focuses on three- to five-year business plans, needs to be adapted for environmental, social and governance risks because they evolve over a longer period, Ms. Paduano said.

Climate change and sustainability issues should also be a risk management concern for asset managers, said Steven Tebbe, Berlin-based managing director of CDP Europe, a nonprofit that offers services to companies, investors and municipalities on environmental impact and sustainability.

“The fiduciary responsibility in most jurisdictions for asset owners is really focused on just the return,” he said.

But pension funds, for example, have long-term investment strategies, Mr. Tebbe said.

“Just looking at the angle of short-term financial return is definitely not enough of a fiduciary responsibility,” he said.

Policymakers could make minor tweaks to fiduciary responsibility regulations that would lead asset owners to reallocate their investments to include sustainability considerations, Mr. Tebbe said.




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