Climate Risk Strategy: How companies can leverage the ISSB and TCFD for guidance

What is your strategy for futureproofing your business from the risks of climate change?

For companies across the globe, developing a climate risk strategy is transitioning from a “nice to have” to a table-stakes proposition. Companies that successfully discover the answers will be better positioned to adapt to the many ways that climate change risk is altering our markets, financing sources, and customer tastes; and ensure that their business is set-up for success in a changing environment. It’s a question that’s relatively straightforward. But for business leaders, under pressure from investors, regulators and other important stakeholders, the answers can prove elusive.

Assessing climate change risk is a similar process to assessing any other enterprise risk a company may face. Many companies have incorporated climate change risk assessments into their existing enterprise risk management systems (ERMs). But what these risk adaptation strategies look like will be different across the economy. Factors such as industry, geography, market positioning, or scale, can all impact how a company may evaluate and manage these risks moving into the future. For example, a car company may develop and produce new electric vehicles to adapt to evolving customer demand; a food company may re-source its supply chain if certain parts of the globe are becoming to overheated or dry for food production; or a cell phone tower provider may use reinforced steel for towers in areas of the world prone to increasingly dangerous hurricane risks.

All of these situations are good examples of companies developing strategies to adapt to climate change risk. What the strategy may entail for one company can, and often times will, look entirely different to another.

The ISSB (International Sustainability Standards Board), and its predecessor the TCFD (Task Force on Climate-Related Financial Disclosures), provide guidance for companies to help develop customized climate risk strategies, one of several criteria sections found within both frameworks. Although any specific strategy must be customized to a particular business, these frameworks provide important instructions for undergoing that process. According to the ISSB, when thinking through strategy development:

• Companies need to provide information that details a response to climate-related risks and opportunities. That includes how the company plans to achieve any climate-related targets it has set and any targets it is required to meet by law or regulation.
• Companies must anticipate any changes to their business model, including resource allocation, to address climate-related risks and opportunities. Such considerations, for example, may include plans to manage or decommission carbon-, energy- or water-intensive operations; resource allocations resulting from demand or supply-chain changes; resource allocations arising from business development through capital expenditure or additional expenditure on research and development; and acquisitions or divestments.

• Companies must focus on direct mitigation and adaptation efforts. For example, through changes in production processes or equipment, relocation of facilities, workforce adjustments, supply chain resiliency, and changes in product specifications.

• Companies should disclose any climate-related transition plans, including information about key assumptions used in developing its transition plan, and dependencies on which the transition plan relies.

• How the company plans to achieve any climate-related targets, including any greenhouse gas (GHG) emissions targets.

When thinking through how these approaches to strategy development may unfold for any particular company, there are key subject areas to evaluate. The TCFD has provided some guidance for where companies can start, and where to look to first.

Resource Efficiency:

• Companies can achieve direct cost savings in the medium to long term by enhancing resource efficiency across various processes like production, distribution, buildings, machinery, transport, materials, water, and waste management. ​
• Technological innovation plays a key role in facilitating this transition, enabling the development of efficient solutions such as heating systems, circular economy practices, LED lighting, industrial motor technology, geothermal power, and water treatment solutions. ​

Energy Sourcing:

• Organizations can benefit from low emission energy sources like wind, solar, wave, tidal, hydro, geothermal, nuclear, biofuels, and carbon capture and storage. ​
• The increasing trend towards decentralized clean energy sources, coupled with declining costs and improved storage capabilities, presents significant opportunities for companies to shift towards these sources and potentially reduce annual energy costs. ​

Products and Services: ​

• Innovation in developing new low-emission products and services can enhance a company's competitive position and cater to changing consumer preferences. ​
• Companies may highlight the low carbon footprint of their products in marketing, especially in sectors like manufacturing, travel, food, beverage, mobility, fashion, and recycling and environmental services, promoting energy-efficient measures throughout the supply chain. ​

Market-Based Opportunities:

• Companies can explore diversifying their activities to align with the transition to a lower-carbon economy, collaborating with various stakeholders like governments, development banks, local entrepreneurs, and community groups. ​
• Opportunities exist in areas such as green bonds, infrastructure for low-emission energy production, energy efficiency, grid connectivity, and transport networks, enabling companies to position themselves strategically for the future. ​

Resiliency:

• Companies can enhance the ability to respond to climate change events and manage associated risks by building resiliency into their business models. ​
• This is particularly important for companies with long-term assets, extensive supply chains, and dependencies on utility and infrastructure networks or natural resources, as well as those requiring long-term financing and investment to adapt to changing climate conditions. ​

Developing a climate risk strategy can be daunting. Companies must think through what factors are most material and must anticipate events that might be new and even unpredictable. But these challenges can be overcome. At Aeterra, we have both the in-house resources and expertise to help our clients navigate this landscape. Our team of experienced sustainability professionals offer a full range of expertise and guidance to ensure the clearest path forward for our clients. We’re here to help and act as a partner to our clients as they work towards a more sustainable business model.

Someday, an important stakeholder may ask about your strategy for futureproofing your business from the risks of climate change, and we can help you discover the answers.