13 April 2022

Why companies face barriers to disclosing climate-related asset risk

Dr. Helen Beddow

By Dr. Helen Beddow

Why companies face barriers to disclosing climate-related asset risk

As climate change accelerates, companies are coming under increasing pressure from regulators, investors and other stakeholders to disclose the financial impacts of climate change on their business.

While this has led to an all-time high in the number of firms making voluntary climate-related disclosures, many companies still encounter barriers when working to accurately report on the risks posed by climate change, especially at the asset level. These barriers can reduce the accuracy of their disclosures and weaken the confidence stakeholders have in their filings. 

Asset-related risks are important for disclosure, and companies finding it challenging to accurately report on asset-related risks need support. Access to Climate Intelligence (CI) can help firms comply with mandatory disclosure regulations, such as the framework recently implemented by the UK government.

You can also find out much more about assessing your climate risk to satisfy UK climate-related disclosure requirements in our free ebook.

Why is understanding asset-related risk important for disclosure? 

More and more countries are making climate-related financial disclosures mandatory, in line with recommendations from the Task Force on Climate-related Financial Disclosures (TCFD). The UK’s regulations went live on 6 April 2022, initially affecting more than 1,300 businesses but extending across the economy by 2025. In the United States, the Security Exchange Commission (SEC) recently put forward its own draft for a US framework, following an executive order by President Biden. 

To comply with TCFD-aligned frameworks, which require companies to disclose transitional and physical climate-related risks, companies must be able to report the impacts of climate change at the asset level. This is because, for many companies, physical climate risk is closely tied to assets they own or rely on. 

According to Cervest’s 2021 Climate Intelligence Outlook, nine in ten UK and US companies have already had a corporate physical asset, such as an office or warehouse, affected by extreme weather. As the climate becomes more volatile, the disruption and damage due to climate change will only increase. Buildings, infrastructure, and supply chains are vulnerable to disruption due to climate change, with significant financial consequences for business operations, revenue and profitability.

Why is accurately reporting climate-related risks to assets so challenging?

The primary reason companies struggle to report on climate-related risks facing individual assets is because climate data is too complex to collate and understand in-house. Our climate is an interconnected system and climate hazards interact with each other - extreme heat can lead to droughts, which can increase the chance of forest fires. Any analysis examining the risk posed to a single building must also consider the climate as a whole. This is not an easy ask for any company that doesn’t specialize in climate data. 

Third-party climate analyses are also usually prohibitively expensive and take a huge amount of time to prepare. They tend to look at risks in generalized, heat-map-style formats which chart the evolution of hazards over regions or countries. This doesn’t provide the granular detail that would allow businesses to surface and communicate the climate-related risks faced by individual assets. 

Even with access to data, many businesses lack access to the tools and in-house knowledge necessary to accurately analyze climate hazards like drought and extreme heat. Data-related barriers present companies with major issues in complying with climate-related financial disclosure. According to Cervest’s climate-related financial disclosure report, 46% of companies have no visibility on extreme weather events, 46% are challenged by the complexity of aggregating data, and 43% lack real-time actionable intelligence. 

Using Climate Intelligence to analyze your climate-related asset risks

The fusion of climate science and advanced machine learning techniques now allow businesses to discover and quantify their climate-related risk. This groundbreaking capability is called Climate Intelligence, and it is revolutionizing the way organizations discover, quantify, and act on climate risks and opportunities. In a recent market perspective, leading analyst firm IDC called Climate Intelligence “a strategic priority” for organizations worldwide and positioned CI as one primary solution to the $23 trillion in global economic losses climate change could cause by 2050.

EarthScan, Cervest’s flagship product, leverages Climate Intelligence to provide everyone with dynamic climate risk analyses at the asset and portfolio levels. Powered by Earth Science AI, EarthScan helps businesses de-risk decision-making and upgrade their climate-related asset risk disclosures with science-backed insights. 

To learn more about enhancing your climate-related financial disclosures and satisfying UK regulations, download Cervest’s ebook: Assessing your climate risk for UK climate-related financial disclosure regulations.

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