The changing climate is not just about wildfires and flooding in coastal regions. It is impacting the financial performance of many prized assets thought to be in the most stable regions of the world. This means that portfolios that were once considered risk-neutral are now transitioning to high-risk asset classes.
Climate Risk: Impact on Safe Assets
Investors are beginning to take notice of the impact of climate change on financial performance. There is a drive for more transparent climate risk reporting, and organisations are being called upon to incorporate these standards into their respective regulatory frameworks. But what does this mean for Chief Financial Officers (CFO) and Chief Sustainability Officers (CSO)? Does your organisation understand physical climate risks and consequences to its portfolio? Are your assets unnoticeably slipping into the stranded asset risk zone? And, more than that, is your organisation credible enough in front of your shareholders and stakeholders for adequately assessing and addressing the decline in portfolio value?
Adaptation and mitigation are the new strategies to afford such challenges, and appropriate solutions are already available. The priority solution is rapid identification of climate related risks, and deployment of solutions that drive faster emissions reduction, accelerating the speed and scale of a clean transition. Companies need to demonstrate their capabilities to manage such risks.
Climate Disruptions to North Sea Operations
We explored a subset of physical climate aspects in the North Sea (generally considered to be a low risk offshore operating environment, compared to the Gulf of Mexico for example), and we found that older fixed installations in northern waters (24% of all installations) could be exposed to higher risk from extreme waves, resulting in potential inundation of topsides and safety critical equipment. The rise of extreme wind events (in Northern and West of Shetland waters especially) pushes the total number of installations at elevated risk up to 35%.
These issues could have real consequences. The overall impact is lower revenue and higher operating costs. And less wiggle room for asset owners to delay as much as possible the decommissioning wave.
Energy Industry Responding to Threats
The threat of climate change is recognised, and some energy industry players are making moves now. Organisations are expressing a growing need for climate change risk management and are looking for help to leverage the latest Climate Science, Engineering and Techno-Economic analysis in managing climate risk impacts. We have also guided organisations into adopting the consolidated TCFD recommendations and as a result, helped them uncover valuable information in terms of new risks to mitigate. More importantly, it enabled opportunities of a business strategic and physical nature, e.g. accelerating the shift to clean technologies, justifying the case for energy efficient and low carbon choices, and tangibly reducing CO2 emissions.
With the impending regulations that mandate disclosure of financial and climate reporting, organisations will need to implement climate risk mitigation plans now in order not to be penalised and incur damage to their reputation, or more tangibly, share price. But there is hope. Just as the changing climate will have an elevated impact on financial performance tomorrow, so too will implementation of the right solutions today.
Avoiding Penalties and Damage - 3 Steps
Balancing ever-evolving regulatory requirements, socio-environmental imperatives with bottom-line drivers has become harder than ever. But here are three main steps that CFOs and CSOs must take in the short term to protect their portfolio:
Appoint a climate risk management focal point – someone familiar with regulatory requirements, and able to guide the organisation on climate-related financial disclosures while articulating the benefits of doing so.
Identify assets at risk from climate change issues, utilising the latest climate science-based risk assessment techniques.
- Obtain expert perspectives on the robustness of ESG disclosures. An ESG consultant can provide regulatory compliance assurance, with a particular focus on the management of physical and business-related climate risks.
As stated during the recent World Economic Forum (WEF 2024), there is no doubt that the climate change challenge is great - it is perhaps the greatest challenge humanity has ever or will ever face. The right solutions, however, can help us mitigate the risks and create a sustainable future. Your next move? take action now to protect your assets, and our planet.
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This blog article has been written by the following experts:
- Ikechukwu Obianyor, Head of UK Advisory Solutions
- Calum Scott, Technical Consultant
- Emilie Sinet - Senior Environmental Consultant