Flagging the financial risks of climate change


Thursday, 19 August, 2021

Flagging the financial risks of climate change

With climate change now recognised as a major threat to economies and financial markets around the world, public and private sector organisations are being asked to provide public disclosures of how current and future climate risks will impact their operations.

Recognising the increased need for climate change impact reporting with a greater focus on financial analysis, sustainability services consultancy Edge Environment is partnering with Frontier Economics, a longstanding economics advisory firm, to help advise businesses on their climate-related financial risks and opportunities.

“The requirements for climate disclosure reporting have been increasing around the world in recent years. We have seen climate change shift from being primarily an environmental or ‘green’ issue to one with legal, governance and financial implications,” said Dr Mark Siebentritt, Edge’s Commercial Director and one of its climate risk analysis experts.

“We are seeing many of our clients step up their analysis of climate risk. This is in response to commentary by financial regulators in Australia about the need for companies to address what is now regarded as a foreseeable and material risk. Change is also coming through international markets, with some countries like England and New Zealand headed toward mandatory climate risk disclosure reporting.”

One of the key challenges of climate risk disclosure reporting aligned to frameworks like the Task Force on Climate-related Financial Disclosures (TCFD) is the need to better understand the financial implications of climate change.

“The impacts of climate change on the financial statements of an organisation is complex. Companies can find it challenging to do this as there are many drivers that need consideration,” Frontier Economics economist Ben Mason said.

“For example, take the impact of extreme heat on a property portfolio. You first need to understand the risk of such extreme weather in different climate change scenarios. Then you need to understand the physical impacts of extreme heat; this may include increased energy costs, damage to the property and even consideration of whether the property is unhospitable in extreme heat. Finally, you need to place a financial value on these physical impacts. Climate risk specialists and financial experts working together can give companies these insights.

“A key risk companies are often interested in is around energy supply transitioning to renewables and the impacts on energy prices. We have energy network models and have provided shadow carbon price advice to various clients.”

Edge Environment and Frontier Economics have worked across a broad range of climate risk projects, including within the property, infrastructure and government sectors. Together, this partnership provides an opportunity to better understand both financial risks and opportunities for Australian and New Zealand businesses.

Image credit: ©stock.adobe.com/au/NicoElNino

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