Feb 29 2024

Integrating GHG Accounting into Your Corporate Risk Management Strategy



Integrating GHG Accounting into Your Corporate Risk Management Strategy

The business case for integrating GHG accounting into risk management is clear and compelling. As the physical and economic impacts of climate change accelerate, companies that fail to proactively manage their exposure to climate risks face a range of potential consequences, from operational disruptions and asset losses to reputational damage and legal liabilities. At the same time, the transition to a net-zero emissions economy is creating new market opportunities and competitive pressures that require businesses to fundamentally rethink their strategies and business models.

In this context, GHG accounting has emerged as a critical tool for helping companies navigate the complex and rapidly evolving risk landscape of climate change. By providing a standardized and verifiable way to measure and disclose a company's carbon footprint, from direct operations to supply chain and product use, GHG accounting enables businesses to:

- Identify and assess their exposure to climate-related risks across the value chain

  • Benchmark their emissions performance against industry peers and best practices
  • Set science-based targets and develop strategies to reduce emissions and manage risks
  • Engage with stakeholders to communicate their climate risk management approach and progress
  • Make informed decisions about investments, partnerships, and business models in light of climate risks and opportunities
    In short, GHG accounting is an essential foundation for building climate resilience and competitiveness in the face of an uncertain and rapidly changing world. Companies that embed GHG accounting into their core risk management processes and use it to drive strategic decision-making will be better positioned to anticipate, adapt to, and even shape the market shifts and regulatory changes that are transforming the global economy.

Integrating GHG accounting into corporate risk management
So how can companies effectively integrate GHG accounting into their existing risk management frameworks and processes? While the specific approach will vary depending on the size, sector, and maturity of each organization, there are several key steps and considerations that can guide the journey:

Assess your current risk management landscape: The first step is to take stock of your company's current approach to risk management, including the framework, processes, and tools used to identify, assess, and manage enterprise-wide risks. This assessment should also consider how climate-related risks are currently integrated (or not) into the ERM program, and what gaps or limitations exist in the current approach.
Engage stakeholders to identify climate risk priorities: Next, engage with internal and external stakeholders to identify and prioritize the climate-related risks and opportunities that are most relevant and material to your business. This can involve conducting interviews, surveys, or workshops with senior leaders, business unit managers, risk owners, and subject matter experts, as well as reviewing external sources such as industry reports, peer disclosures, and scientific assessments.
Conduct a GHG inventory and risk assessment: With the priority climate risks identified, the next step is to conduct a comprehensive GHG inventory to measure and quantify the company's emissions across all relevant scopes and boundaries. This inventory should follow recognized standards and methodologies such as the GHG Protocol, and be assured by an independent third party to ensure accuracy and credibility. The results of the inventory can then be used to assess the company's exposure to specific climate risks, such as carbon pricing, supply chain disruptions, or reputational damage.
Integrate climate risks into ERM framework and processes: Based on the results of the GHG inventory and risk assessment, the next step is to formally integrate climate-related risks into the company's existing ERM framework and processes. This can involve updating risk taxonomies, assessment criteria, and reporting templates to explicitly include climate factors, as well as assigning ownership and accountability for managing climate risks across the organization. It may also require enhancing the skills and capabilities of risk managers and other key personnel to effectively understand and manage the unique characteristics of climate risks.
Set targets and develop risk mitigation strategies: With climate risks fully integrated into the ERM program, the company can then set science-based targets for reducing its GHG emissions in line with the goals of the Paris Agreement, and develop strategies and action plans to mitigate its exposure to priority risks. These strategies should be based on a thorough analysis of the costs, benefits, and feasibility of different risk mitigation options, and should be aligned with the company's overall business objectives and risk appetite.
Monitor, report, and adapt: Finally, it is critical to establish processes and systems for monitoring and reporting on the company's climate risk management performance over time, and for continuously adapting and improving the approach based on new data, insights, and feedback from stakeholders. This can involve setting key risk indicators and performance metrics, conducting scenario analyses and stress tests, and regularly reporting to senior management and the board on the effectiveness of the climate risk management program.
By following these steps and embedding GHG accounting into the core of their risk management approach, companies can develop a more complete and nuanced understanding of their exposure to climate-related risks, and make more informed and strategic decisions to build resilience and drive long-term value creation.

Challenges and best practices

Of course, integrating GHG accounting into corporate risk management is not without its challenges and pitfalls. Some of the key obstacles that companies may face include:

Data availability and quality: Collecting accurate and complete GHG emissions data across complex global value chains can be difficult, particularly for Scope 3 emissions from suppliers, customers, and other partners. This can lead to data gaps, inconsistencies, and uncertainties that undermine the reliability and usefulness of risk assessments and mitigation strategies.
Methodology and boundary inconsistencies: The lack of standardization and harmonization in GHG accounting methodologies and boundaries can make it difficult to compare and aggregate emissions data across different business units, geographies, and time periods. This can create confusion and inconsistency in how climate risks are assessed and managed across the organization.
Organizational silos and resistance to change: In many companies, risk management and sustainability functions operate in separate silos, with limited cross-functional collaboration and communication. This can lead to a lack of shared understanding and buy-in for integrating climate risks into ERM, as well as resistance to changing established processes and ways of working.
Short-term focus and lack of leadership: The long-term and systemic nature of climate risks can be difficult to reconcile with the short-term focus and incentives of many businesses, particularly in the face of competing priorities and pressures. Without strong leadership and governance from the top, it can be challenging to drive the necessary changes and investments to fully embed climate risk management into the organization.

To overcome these challenges and effectively integrate GHG accounting into risk management, companies can adopt several best practices and lessons learned from leading organizations:

Establish robust GHG accounting systems and processes: Investing in strong data management systems, calculation methodologies, and quality assurance processes is critical for ensuring the accuracy, completeness, and consistency of GHG emissions data. This can involve using specialized software tools, engaging third-party verification services, and training employees on data collection and reporting procedures.
Use scenario analysis to assess and manage climate risks: Conducting scenario analysis is a powerful way to explore the potential impacts of different climate futures on the business, and to test the resilience of risk management strategies under a range of plausible outcomes. By considering multiple scenarios based on different assumptions about policy, technology, and market trends, companies can develop a more robust and flexible approach to managing climate risks.
Engage senior leadership and board in climate risk governance: Securing buy-in and leadership from the top is essential for driving the integration of climate risks into ERM and ensuring that it remains a strategic priority for the organization. This can involve establishing a board-level committee or advisory group on climate risk, setting executive compensation targets tied to emissions reduction goals, and regularly reporting on climate risk management performance to senior decision-makers.
Collaborate and share best practices with industry peers and stakeholders: Given the complexity and rapidly evolving nature of climate risks, it is important for companies to collaborate and share knowledge with their industry peers, as well as with policymakers, investors, and civil society groups. Participating in industry associations, benchmarking studies, and multi-stakeholder initiatives can help companies stay up-to-date on the latest developments and best practices in climate risk management, and drive collective action to address shared challenges.

The future of GHG accounting and climate risk management
Looking ahead, the integration of GHG accounting and climate risk management is poised to become an increasingly important and mainstream practice for businesses worldwide. As investors, regulators, and other stakeholders demand greater transparency and action on climate risks, companies that fail to proactively measure and manage their emissions will face growing pressure and potential liabilities.

At the same time, the need for more standardized, comparable, and decision-useful climate risk disclosures is driving a wave of new regulations and reporting frameworks, such as the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the proposed SEC rule on climate risk disclosure in the US. These developments are likely to accelerate the convergence and harmonization of GHG accounting methodologies and standards, and create a more level playing field for companies to assess and report on their climate risks.

Furthermore, the rapid advancement of digital technologies and data analytics is opening up new opportunities for companies to streamline and automate their GHG accounting and risk management processes. From using artificial intelligence and machine learning to improve the accuracy and efficiency of emissions data collection and analysis, to leveraging blockchain and IoT sensors to track and verify emissions across the value chain, the potential for technology to transform climate risk management is vast and largely untapped.

Ultimately, however, the success of integrating GHG accounting into corporate risk management will depend not just on the tools and frameworks used, but on the culture and mindset of the organizations that use them. Building a truly climate-resilient business requires a fundamental shift in how companies think about and manage risks, from a narrow and short-term focus on financial performance to a more holistic and long-term view of value creation that considers the interests of all stakeholders.

This shift will not be easy, and will require bold leadership, innovative thinking, and a willingness to challenge the status quo. But for companies that embrace this challenge and seize the opportunity to integrate GHG accounting into their risk management strategies, the benefits are clear and compelling: greater resilience, competitiveness, and long-term value creation in the face of an uncertain and rapidly changing world.

As a sustainability and risk management professional, I am excited and encouraged by the progress and momentum we are seeing in this space, and I am committed to working with my colleagues and partners to help accelerate the integration of climate risks into corporate decision-making. By harnessing the power of GHG accounting and using it to drive strategic and proactive risk management, we can not only help our organizations thrive in the low-carbon economy, but also contribute to the urgent global effort to tackle the climate crisis.

The road ahead is complex and challenging, but the destination is clear and the stakes are high. With courage, collaboration, and a commitment to continuous learning and improvement, we can build a more resilient and sustainable future for our companies, our communities, and our planet.

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