How can financial managers prepare for climate change risks?

Climate change is not only an environmental issue, but also a financial one. It poses significant risks and opportunities for businesses, investors, and regulators. Financial managers need to understand how climate change affects their operations, strategies, and stakeholders, and how to adapt accordingly. In this article, we will discuss some of the key steps that financial managers can take to prepare for climate change risks.

1 Assess the exposure

The first step is to assess the exposure of the business to climate change risks. These risks can be physical, such as damage to assets, disruption of supply chains, or increased costs of insurance, or transition, such as changes in regulations, consumer preferences, or market conditions. Financial managers can use various tools and frameworks to identify and quantify these risks, such as scenario analysis, carbon footprinting, or stress testing.

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Clint Engler

CEO/Principal: CERAC Trader Strategies Inc. FL USA..... Currencies/Digital Assets, Economy, & Finance
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To weather the storm of climate change risks, financial managers can be proactive by assessing their exposure through scenario analysis and stress testing, integrating climate considerations into investment strategies and risk management, disclosing potential impacts transparently, and managing portfolios for resilience by favoring sustainable assets and minimizing carbon footprint. This comprehensive approach can safeguard returns and navigate the shifting financial landscape towards a greener future.

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Jim Kirby

"The fault, dear Brutus lies not in our stars, but in ourselves"
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If you are the financial Officer a company that consumes electricity you want to be sure of the electricity costs, the reliability of supply, the security of the supply and the resiliency of supply. If the cost is not competitive your product exports are at risk. If the carbon emissions targets are not met, you may find import taxes imposed on the carbon content of your products. If there is heavy reliance on intermittent generation with natural gas back up, your price of electricity may shoot up if there are international event endangering the gas supply. Wind energy droughts could leave you with prolonged electricity supply. Delays to generation may raise your cost or lead to supply interruptions.

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2 Disclose the impact

The second step is to disclose the impact of climate change risks on the financial performance and position of the business. This is not only a matter of transparency and accountability, but also a way to attract and retain investors, customers, and employees who are increasingly concerned about sustainability. Financial managers can follow the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which provide a consistent and comparable approach to reporting on climate change risks and opportunities.

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Jim Kirby

"The fault, dear Brutus lies not in our stars, but in ourselves"
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If you are relying on non-fossil heat or electricity to meet your customer's expectations and the carbon content of that supply fluctuates in response to the variable output of intermittent generation or delays to other generation, you must estimate and disclose the possible ranges for the carbon emissions as well as the financial exposure due to import taxes on carbon content in the goods you make.

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3 Integrate the strategy

The third step is to integrate the strategy of the business with the goals and expectations of the stakeholders regarding climate change. This means aligning the business model, products, and services with the low-carbon transition, and investing in innovation, efficiency, and resilience. Financial managers can use various methods and metrics to evaluate and communicate the value of these actions, such as return on investment, net present value, or social return on investment.

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Jim Kirby

"The fault, dear Brutus lies not in our stars, but in ourselves"
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You may want to relocate in an area with the costs and emissions that you and your customers find acceptable. Depending upon the nature of your business, relocation to another area may not be possible. You would want to stay in contact with government policy makers to make sure that their plans for compliance are solid and raise your voice if they are not. You may want to negotiate price assurance, if possible.

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4 Manage the portfolio

The fourth step is to manage the portfolio of the business in relation to climate change risks and opportunities. This means diversifying the sources of revenue and income, and reducing the exposure to high-carbon or climate-sensitive sectors and assets. Financial managers can use various techniques and instruments to optimize the portfolio, such as asset allocation, hedging, or green bonds.

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5 Engage the stakeholders

The fifth step is to engage the stakeholders of the business on climate change issues. This means collaborating with suppliers, customers, regulators, and peers to share best practices, influence policies, and create synergies. Financial managers can use various channels and platforms to communicate and interact with the stakeholders, such as surveys, forums, or networks.

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6 Monitor the trends

The sixth step is to monitor the trends and developments related to climate change and its implications for the financial sector. This means staying informed and updated on the latest research, data, and standards that affect the business and its stakeholders. Financial managers can use various sources and tools to access and analyze this information, such as reports, databases, or dashboards.

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