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Welcome to Sustainability Reporting 2.0 — a new era that combines financial and non-financial factors to paint a clearer picture of the risk, reward and outcomes of sustainability efforts. This multi-dimensional, holistic approach represents a tectonic shift in sustainability reporting. The usual suspects like energy use and emissions are now being coupled with social, economic and governance metrics.
Let’s move beyond carbon emissions, and check out a Key Performance Indicator (KPI) that companies should track and report.
In the following Q&A, our experts dive into a critical KPI:
Financial Risk Due to Climate Change
Climate change continues to be in the news. With the risk of rising sea levels and hotter temperatures, the world and its ecosystems are threatened. However, not only does it endanger the environment but it also poses a significant financial risk to organizations that don’t track, report and work to manage emissions, or pay attention to rules and regulations around climate concerns.
Companies must start concerning themselves with the climate impact of their operations to protect against financial risks and implications.
Q: What are we talking about when we say financial risk?
A: Essentially, it’s a strategic business approach toward understanding risks and quantifying costs as a result of the effects of climate change. These can include governmental regulations and physical effects of nature, such as drought and flooding. Understanding new risks may have financial impacts on a business. That understanding is not only key for staying competitive, but investors, stakeholders, and reporting agencies are asking for this data as well.
Q: How do companies get financial risk tied to climate change?
A: Internal risk management and investor relations teams evaluate market trends and company performance to better understand and mitigate against these risks.
Q: What are meaningful metrics when it comes to financial risk?
A: One example relates to unexpected closures at a particular facility or region due to weather patterns becoming increasingly unpredictable. As a result, a company may allocate a percentage of its operational costs to anticipate closures, appliance repairs, remodeling, etc. And those costs would be included in a roll-up of the financial implication of climate change.
Q: What’s the market driver effecting this KPI?
A: Climate change continues to affect weather patterns, making it even more difficult for organizations to mitigate against risks of certain environmental factors (e.g., water). Climate change has sparked government action, requiring companies to report on emissions and their impact to the environment. To stay competitive and continue running, companies must report this data and understand the risks and effects climate change has on their business.
Q: Who is setting the standard for measuring and managing climate-related financial risks?
A: This manufacturer quantifies risks and opportunities as an impact of climate parameters such as flooding, tornadoes and drought, and consumer behavior.
Q: Why is gathering this data important to the company?
A: It is important for this company to gather this data as it helps maintain compliance with air pollution and other environmental guidelines. It also protects against any financial implications of not maintaining compliance with governmental regulators, such as the U.S. Environmental Protection Agency that requires companies to report on these metrics.
Q: How do they report and use this data?
A: In order to remain compliant in air pollution and emissions, this company discloses a dollar range for its climate impact.
While sustainability reporting isn’t novel, the definition of what it means to be “sustainable” is rapidly changing. Using an expanded set of KPIs, which extend the breadth and depth of reporting, is giving companies a complete, accurate view into their sustainability performance.
It also provides the ability to uncover opportunities to improve and streamline operations, which means a healthier bottom line. As more investors, consumers and employees demand transparency, businesses that embrace this shift and lead instead of lag are putting themselves in position to further boost reputational and financial gains.
Download The Evolution of Sustainability Reporting: 3 KPIs Every Company Should Be Tracking for more information and case studies on companies that are setting the standard in the new era of reporting.