Defining ’Material’ Climate Risks

It’s well known now that climate change poses a significant risk to society. The problem is getting business leaders to start recognizing how their businesses may be affected.

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Leading Sustainable Organizations

Corporate adoption of sustainable business practices is essential to a strong market environment and an enduring society. What does it mean to become a sustainable business and what steps must leaders take to integrate sustainability into their organization?
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Most national governments and their regulatory agencies recognize climate change as a material risk to society, the natural environment, and economic and financial stability. These agencies want companies that contribute to their economy’s financial stability to factor in climate change as a material risk, thereby aligning the material concerns of society and economy. But, encouraging such alignment is easier said than done.

Companies know that climate change is relevant to their businesses. If they don’t address it in corporate reports, however, it’s because corporate leaders don’t believe climate change is material to their business: Either they think the effects of climate change are beyond their planning horizon or it’s just not clear whether or how climate change might be a material business risk.

Enter the Financial Stability Board (FSB), one of the most influential international agencies focused on addressing vulnerabilities in the financial system and developing and implementing strong regulatory, supervisory, and other policies to assure financial stability in the global economy. The FSB counts among its members the Bank of England, the U.S. Treasury, the U.S. Securities and Exchange Commission, the People’s Bank of China, Germany’s Bundesbank, the International Monetary Fund, and others.

This august group set up a new initiative, the Task Force on Climate-related Financial Disclosures (TCFD), to develop a set of recommendations to help companies identify and disclose climate-related risks that are material to their business and report this information to their investors.

The TCFD spent one year consulting companies, investors, and key financial players from different countries before delivering the much-awaited result: three reports, over 200 pages, outlining what, where, why, and how companies should report what they call “climate-related financial information.”

We stress the word “financial” because the Task Force seeks to move the issues related to climate change out of sustainability departments and into the boardrooms of every corporation in the world, no matter how big or small. To achieve this, it is necessary for companies to understand what financial risks and opportunities climate change creates for their business.

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Topics

Leading Sustainable Organizations

Corporate adoption of sustainable business practices is essential to a strong market environment and an enduring society. What does it mean to become a sustainable business and what steps must leaders take to integrate sustainability into their organization?
See All Articles in This Section

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