Unlock Climate Risk Insights With Investment-Grade ESG Performance Data

Unlock Climate Risk Insights With Investment-Grade ESG Performance Data

There are material benefits that financial and non-financial corporations alike can expect from stepping up their climate resilience investments. Yet the private sector’s climate adaptation spending remains far below capacity.

The key barrier, for both issuers and commercial financial institutions, is the lack of standardized metrics and methodologies for performing climate risk assessments and, as a result, the lack of reliable and comparable data underscoring the bottom line advantages of climate adaptation.

To overcome these barriers, companies will need to work with their stakeholders to build and disseminate a unique enterprise climate risk exposure profile. Without definitive guidance for climate risk assessments, business leaders will need to extract climate risk insights from the “investment grade” ESG performance data they’re already expected to generate and report. And to ensure the decision usefulness of both their ESG data and its climate risk derivatives, companies will need to adopt appropriate ESG performance measurement, management and reporting technologies.

At first look, this is a mammoth undertaking. Companies often lack the skills or resources needed to measure and manage their ESG performance, and few have yet to incorporate climate into their enterprise risk management.

But the task need not be impossible. First, companies must perform a comprehensive, stakeholder-influenced materiality assessment, or a meticulous accounting of the organization’s financially relevant “E” impacts — both inward and outward. Second, companies must implement a cloud-supported system of record where “E” performance KPIs are collected and collated for subsequent climate risk analyses.

Make no mistake, companies’ self-reported climate risk data is vital. Because while companies’ and investors’ use of third-party asset, enterprise and portfolio-level climate risk modeling solutions is increasingly ubiquitous, the lack of standards for quantifying physical climate risks especially means there’s a low correlation in providers’ assessments.

In practice, the materiality assessment gives companies an opportunity to identify the “E” impacts their investors prioritize, and set consensus goals for how those impacts are managed, as well as how those management efforts are evaluated and disclosed. Further, this process gives reporting firms clearer direction on the points of climate-related financial risk exposures they’ll do well to manage.

To illustrate this point, imagine a vertically integrated coffee producer that, through its materiality assessment, learns its water and fertilizer usage — outward “E” impacts — are irregular across geographies. If an investigation into those irregularities finds that drought, soil degradation and other symptoms of a changing climate at Site A — inward “E” impacts — are requiring the company to use more water and fertilizer to produce the same amount of coffee beans as produced at Site B, then they have the requisite variables for determining their climate risk exposure.

This is where the advantage of a cloud-supported system of record for ESG performance KPIs over a dedicated climate risk modeling solution is most apparent. Specifically, while the latter may be able to model climate risk exposures, the former enables users to benchmark their specific climate risks and then monitor both the ESG and financial performance outcomes of their subsequent adaptation efforts.

Revisiting our coffee producer, we can imagine a scenario where they decide to either ramp up cultivation at Site B while scaling down operations at Site A, or maintain cultivation at Site B while scaling down operations at Site A and sourcing the remainder from a third-party supplier.

If these two courses of action are anticipated to carry the same climate risk mitigation and financial performance outcomes, then the decision will come down to their respective effects on the firm’s overall ESG performance. And with the right system of record and supplemental analytical tools in place, the bean counters at our hypothetical coffee producer firm will be able to make that call with confidence.

There are, admittedly, shortcomings to this approach. Chief among them is the absence of climate risk forecasts derived from analyses of, for instance, precipitation, temperature and sea level data. These shortcomings notwithstanding, it’s important that business leaders recognize the short and long-term advantages of establishing the sort of cloud-supported ESG data management and reporting systems described above.

In the short term, the data these systems produce will be appreciated by investors. Primarily short-termist, investors are likely more concerned with their portfolio companies’ awareness of their present and reasonably anticipated near-term ESG risks, goals for managing them and progress towards those goals than they are with long-term horizon climate risk exposures.

In the short, medium and long terms, these systems help users independently identify their own climate risks, as opposed to industry- and geography-specific risks, and evaluate their management of them. More importantly, they help enterprise end-users determine whether their climate adaptation measures compromise their overall ESG performance and, ultimately, collate this information into auditable ESG and financial disclosures.

This is not only the information that investors want and regulators increasingly require, but the data that will help business leaders build more resilient, future-proofed and investable enterprises.

R. Mukund is the founder and CEO of Benchmark Digital Partners (Benchmark), the brand owner and service provider for Benchmark ESG | Gensuite, a leading global provider of cloud-based enterprise Environmental, Social and Governance (ESG) performance measurement, management and reporting solutions.

Mukund is a proven organization leader with 30 years’ experience in progressive roles as a technical professional, team leader, Six Sigma Master Black Belt, executive program manager and, now, Chief Executive Officer. He has a track record of distinction in diverse organizations from research & technology, consulting, corporate diversified & global to cloud-based, tech-enabled services.

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