Higher temperatures, rising sea levels, and extreme weather events are a source of financial risk. Natural catastrophe losses have cost $1.28 trillion more in the last five years1, while researchers estimate that $43 trillion of the world’s assets will be at risk by 21002—all because of climate change.
As the frequency and severity of climate events increase, lenders, investors, and insurance underwriters are exploring how best to assess and address climate-related risks. To accomplish this, asset managers must decide where efficiencies can be made and how they can provide greater transparency around Environmental, Social, and Governance (ESG) commitments to stakeholders in the form of climate-related disclosures.
Climate-related Financial Disclosures include information about the climate-related risks the company is facing, as well as how these risks are identified, managed, and measured. This serves to reassure stakeholders that the appropriate actions are being taken to measure and mitigate the potential impacts of weather events and shifts in climate patterns on assets, people, ecosystems, etc.
Task Force on Climate-related Financial Disclosures
The Task Force on Climate-related Financial Disclosures (TCFD) was created by the Financial Stability Board (FSB) to support companies in developing greater transparency in decision making. The TCFD provides recommendations and guidance on the financial implications, risks, and opportunities associated with the transition to a lower-carbon economy. Its goal is to ensure organisations adopt these suggestions as part of their strategic planning and risk management processes.
Asset Management and Climate-related Disclosures
The TCFD has identified five key financial institutions that should incorporate the recommendations and guidance:
- Banks (lending)
- Insurance companies (underwriting)
- Asset managers (asset management)
- Investors (Asset owners, including public- and private-sector pension plans)
- Endowments and foundations (investing)
While emphasis has been placed on financial institutions, these recommendations have been extended to the industries responsible for the largest amount of greenhouse gas emissions, energy usage, and water usage. Notably, this includes four groups:
- Materials and buildings
- Agriculture, food and forest products
For asset owners and managers, the TCFD’s recommendations will have a huge impact on their approach to capital planning. With climate-related issues in mind, asset-intensive industries will have to adapt their long-term plans to accommodate the need for more resource-efficient assets.
How can decision analytics solutions help?
Copperleaf® helps clients create and execute investment plans that drive strategy, proactively manage risk, improve performance, and make meaningful progress toward their climate-related objectives. This article describes how our solutions support the TCFD’s recommendations in four key areas:
Investors and stakeholders must understand the processes and management involved in overseeing climate-related issues. This includes how risk is reviewed, implemented, and measured, as well as who monitors these procedures and is responsible for taking the appropriate action.
The Copperleaf Decision Analytics Solution is underpinned by a Value Framework, a clear set of principles clients can use to evaluate all potential investments on a common economic scale. This means that decisions are transparent, based on robust data and can easily be communicated and defended to key stakeholders. For example, an organisation may choose to invest in more eco-friendly energy sources. When questioned, users can point to the values underpinning the decision and explain the rationale behind the investment.
Strategy is a key element of planning for every business, and any factors that impact strategic decisions should be communicated to investors and stakeholders. How organisations choose to address climate-related issues will influence short- and long-term strategy and should therefore be disclosed.
The Copperleaf solution enables organisations to create a comprehensive understanding of value across the business, align investments to strategic objectives, and improve the transparency of their investment planning processes. This unique quantitative approach drives consensus, provides visibility to stakeholders, and links day-to-day decisions with business strategy.
3. Risk management
To support users of climate-related financial disclosures, companies must illustrate how risks are identified, assessed, and managed.
Copperleaf Asset™ helps clients forecast sustainment needs and manage risk in critical infrastructure. By assessing the risk, cost, and value associated with different asset strategies over time, organisations can create optimal plans that meet all constraints and targets. Climate-related data can also feed into Copperleaf’s analytics, allowing organisations to model risk, impact, and investment at an individual asset level as well as on a broader scale, to accommodate climate-related demands in their asset investment planning.
4. Metrics and targets
Investors and other stakeholders need a way to monitor how climate-related risks are measured and managed. Organisations should disclose the key metrics used in these processes in order for stakeholders to understand the company’s exposure to climate-related issues, whether they can meet financial obligations, and so on.
With the Copperleaf solution, organisations can track progress toward achieving strategic goals and KPIs to provide visibility into meeting both short- and longer-term climate resilience objectives. Clients can access Copperleaf’s Value Framework Library, an extensive collection of best practice value models that have been proven and accepted by peer organisations and regulatory bodies. This allows organisations to align their investment decisions with climate-related goals and outcomes.
Contact us to find out how Copperleaf can help your organisation integrate ESG measures and the TCFD guidance in your investment planning process—to ensure your climate-related financial disclosures are transparent, cost-effective, and aligned with your strategic goals.
1 Munich Re, “Hurricanes, cold waves, tornadoes: Weather disasters in USA dominate natural disaster losses in 2021,” January 10, 2022; “Record hurricane season and major wildfires — The natural disaster figures for 2020,” January 7, 2021; “Tropical cyclones causing billions in losses dominate nat cat picture of 2019,” January 8, 2020; “The natural disasters of 2018 in figures,” January 8, 2019; and “Hurricanes cause record losses in 2017 — The year in figures,” January 4, 2018.
2 The Economist Intelligence Unit, “The Cost of Inaction: Recognising the Value at Risk from Climate Change,” 2015