Assessing and managing climate risks and opportunities under ASRS - 100% Renewables

Assessing and managing climate risks and opportunities under ASRS

In this article, we’re focusing on what you need to be mindful of when disclosing your climate-related risks and opportunities under the mandatory climate legislation IFRS/ASRS.

Previously in the series

Before we look at climate risks and opportunities under IFRS/ASRS, ensure you’re up to date with developing carbon footprints under ASRS.

Join Barbara Albert, our Co-CEO, as she provides an overview of climate risks and opportunities disclosures

Overview of risk-related aspects of ASRS

The Australian Sustainability Reporting Standards (ASRS) aim to enhance transparency and accountability by mandating that businesses provide detailed information on how climate change impacts their operations and financial health.

➡️ A central purpose of ASRS is to ensure that your business communicates how climate change affects your financial standing to stakeholders. This move towards standardised disclosures aims to make it easier for everyone to compare and understand the potential impact of climate risks across different organisations.

➡️ You must evaluate and determine the significance of climate-related risks and opportunities on your business. This means looking closely at how these factors could affect your financial statements and overall financial prospects.

➡️ The standards require detailed disclosures encompassing the four pillars of governance, strategy, risk management, and metrics and targets related to climate issues. This comprehensive approach ensures that stakeholders have a clear view of how your company is addressing climate-related challenges and opportunities.

Climate risks disclosures under the four pillars

Let’s revisit what you have to report under the four pillars in terms of climate risks and opportunities:

Figure 1: The four disclosure pillars under ASRS
Figure 1: The four disclosure pillars under ASRS

1️⃣Governance: Transparency about your company’s governance structure regarding climate risks and opportunities is crucial. This includes explaining how the board oversees these issues and the role of management in addressing them.

2️⃣Strategy: You should openly discuss the real and potential impacts of climate-related risks and opportunities on their strategy and financial planning. This involves assessing the resilience of your strategy under various climate scenarios, helping stakeholders understand the long-term sustainability of your business model. Please note that we will discuss scenario analysis in the next ASRS blog post.

3️⃣Risk management: It’s important to disclose how your company identifies, assesses, and manages climate-related risks. This shows stakeholders that you’re proactive in mitigating potential impacts on your business.

4️⃣Metrics and targets: Finally, you need to provide specific metrics and targets that are used to gauge and manage climate-related risks and opportunities. This includes reporting on direct and indirect greenhouse gas (GHG) emissions (Scope 1 and Scope 2, and material Scope 3s) and outlining the targets set to manage these risks, along with your performance against these targets.

Risks and opportunities you should assess

Businesses face a complex array of risks and opportunities as the climate change environment evolves, which may have a substantial impact on operations, financial performance, and strategic direction. This section outlines the climate risks and opportunities that you should analyse for ASRS compliance, broadly described as ‘physical’ risks and ‘transition’ risks.

Join Barbara Albert, our Co-CEO, as she provides an introduction to climate risks and opportunities

Figure 2: Physical and transition climate-related risks
Figure 2: Physical and transition climate-related risks

Physical risks
Physical risks encompass both acute and chronic climate-related aspects:

➡️Acute risks are event-driven and include natural disasters like floods, cyclones, bushfires, and extreme weather conditions. These events can cause direct damage to infrastructure, disrupt supply chains, and impact your operations.

➡️Chronic risks emerge from gradual changes in climate patterns. Examples include rising sea levels, long-term shifts in precipitation leading to water scarcity or surplus, increased average temperatures, and changing agricultural zones. These risks can affect the availability of resources, operational efficiency, and even the viability of certain locations for your business.

Transition risks
As the global economy moves towards net zero, transition risks become increasingly relevant:

➡️Policy and legal risks involve changes in laws and regulations to address climate change, such as carbon pricing mechanisms, emissions reporting requirements, and regulations aimed at conserving natural resources. These can lead to increased compliance costs or necessitate operational changes.

➡️Technology shifts offer both risks and opportunities. The emergence of new technologies for energy efficiency or renewable energy sources can render existing assets or processes obsolete. At the same time, early adoption can provide competitive advantages.

➡️Market changes may occur as consumer preferences shift towards greener products and services, affecting demand patterns. Companies slow to adapt may lose market share to more agile competitors.

➡️Reputational impacts can affect businesses that fail to meet growing public and stakeholder expectations for low carbon practices. Conversely, companies leading in decarbonisation can enhance their brand value and customer loyalty.

Figure 3: Climate-related opportunities
Figure 3: Climate-related opportunities

Opportunities
In addition to identifying risks, ASRS compliance involves recognising opportunities related to climate change.

➡️Operational efficiency improvements through energy-saving measures and resource optimisation can reduce costs and emissions.

➡️Product and service innovation to meet the demand for low carbon alternatives can open new markets and revenue streams.

➡️Access to new funding sources, such as green bonds and sustainability-linked loans, can become available to companies demonstrating commitment to climate action.

➡️Enhanced competitive positioning can be achieved by companies that lead in sustainability, attracting environmentally conscious consumers and partners.

➡️Resilience and adaptation strategies can mitigate physical risks, ensuring long-term business continuity and reducing potential losses.

From risk identification to management and ASRS compliance

After identifying climate-related risks and opportunities, transitioning to effective management and aligning with Australian Sustainability Reporting Standards involves several strategic steps.

Join Barbara Albert, our Co-CEO, as she examines risk management and ASRS compliance

➡️Integrating into strategy and planning: Once risks and opportunities are identified, the next step is integrating these insights into your strategic planning and business operations. This involves revisiting your business model and strategy to accommodate and adapt to these climate-related factors. Consider how these risks and opportunities affect your long-term objectives, investment decisions, and operational efficiency. Embedding climate considerations into your corporate strategy ensures alignment with ASRS’s emphasis on disclosing the impact of climate-related issues on business strategy and financial planning.

➡️Policy development: Developing and integrating specific policies related to climate change is a strategy that supports compliance and effective management of climate-related risks and opportunities. This might include sustainability policies, green procurement standards, or carbon management strategies. Ensure these policies are well-communicated internally and embedded into all levels of your organisation, from executive decisions to daily operations, aligning with ASRS’s governance disclosure requirements.

➡️Enhancing risk management: Strengthen your risk management framework to encompass climate-related risks, integrating them into your overall risk management strategy. This involves identifying specific risk indicators, setting thresholds for risk tolerance, and establishing monitoring and reporting mechanisms. ASRS mandates detailed disclosures on how businesses identify, assess, manage, and monitor climate-related risks, making it essential to have a robust process in place.

➡️Metrics and targets: Define clear, quantifiable metrics and targets for managing climate-related risks and capitalising on opportunities. This could involve setting greenhouse gas (GHG) emission reduction targets, energy efficiency goals, or milestones for increasing the use of renewable energy. These metrics and targets should be ambitious yet achievable, directly supporting your strategic objectives and demonstrating your commitment to managing climate impacts, in line with ASRS’s requirements for metrics and target disclosures.

➡️Ongoing monitoring and reporting: Establish regular monitoring and reporting mechanisms to track your progress against set metrics and targets. This ensures continuous oversight and the ability to adjust strategies in response to evolving risks, opportunities, and regulatory landscapes. ASRS compliance demands transparency in reporting, making it vital to have effective systems in place for collecting, analysing, and disclosing climate-related information.

➡️Leveraging technology: Use technology and data analytics tools to enhance your climate risk management and reporting capabilities. This could involve software for calculating carbon footprints, risk analysis models, or platforms for stakeholder engagement.

➡️Engaging with stakeholders: Engage actively with stakeholders, including investors, customers, suppliers, and employees, to communicate your approach to managing climate risks and seizing opportunities. Transparent communication enhances trust and supports the collaborative effort needed to address climate challenges.

➡️Adapting and improving: The journey to ASRS compliance and effective climate risk management is ongoing. Regularly review and refine your strategies, policies, and processes in response to new insights, technological advancements, and changes in the regulatory and physical environment. Continuous improvement is key to staying ahead in a dynamic climate landscape and ensuring long-term sustainability and resilience.

Conclusion

The transition to ASRS compliance offers your business a prime opportunity to lead in corporate sustainability, turning climate risk management into a strategic advantage. By understanding and acting on both the challenges and opportunities presented by climate change, you can enhance your resilience and contribute to a sustainable future.

Next in the series

In our next blog post, we’ll go into greater detail on scenario analysis…

Remember that if you need help with identifying and managing your climate risks and opportunities, we are here to help. To dive deeper into how you can effectively identify and manage climate-related risks specific to your industry, visit our Climate Risks and Opportunities page.

Our ASRS complimentary course

In our ongoing dedication to assist businesses in their sustainability endeavours, we’ve revamped this multi-part blog and video series into a complimentary online course. Alongside the video content, the course offers additional resources and quizzes designed to enhance your comprehension of the ASRS.

Kickstart your journey towards mastering the ASRS. Join now by following this link. Don’t hesitate to share this opportunity within your network to collectively advance the climate agenda.

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