Climate Change and Sustainability Risks

The growing focus on climate change and issues related to sustainability are creating opportunities and risks for organizations.  Some organizations are viewing climate change and sustainability as an opportunity to market or brand itself as a good corporate citizen as it relates to the environment, while others are looking at climate change and sustainability as a source of potential risk that may threaten the organization’s business model for the future.  A recent Ernst & Young thought paper analyzes how climate change and sustainability may interact with a number of enterprise-wide risks, including those related to strategic, compliance, financial, reputational, and operational risks. 

While this thought paper highlights the importance of internal audit’s involvement in identifying and understanding risks associated with climate change and sustainability, the guidance is useful to all senior executives and boards as they oversee this emerging risk exposure. The paper describes how climate change and sustainability impacts these five risk areas:

Strategic

There are a number of ways organizations may face strategic risks associated with climate change and sustainability, including the fact that many companies are being evaluated based on their climate change performance.  Many are looking for ways to turn climate change risks into strategic opportunities.

Compliance

Regulations are growing related to actions that impact the environment, health and safety, human rights, and labor laws. Organizations face a number of risks of directly violating these regulations and in some cases they face the risk that they may be indirectly exposed to regulatory risks.  Organizations are realizing a need to evaluate their infrastructures to monitor and manage compliance with these expanding requirements.

Financial

Share price valuations are directly and indirectly being affected by increased investor interest in corporate strategies to address climate change and sustainability.  Furthermore, the need for compliance is increasing costs associated with managing sustainability requirements.  As a price for carbon is set in varying jurisdictions, emerging compliance requirements will have cash management and liquidity implications.  Finally, as external reporting about climate change and sustainability increases, CFOs will need to have systems and processes in place to collect, measure, and report related data.

Reputational

One of the current motivations for greater corporate focus on climate change and sustainability is that many companies face growing expectations from key stakeholders to reduce the corporation’s impact on climate change and sustainability concerns.  Climate change and sustainability performance is linked to customer satisfaction, supplier relationships, hiring and retaining top talent. As a result, management is focusing more on the reputational impact of their corporate actions on climate change and sustainability issues.

Operational

The management of risks associated with climate change and sustainability often requires greater investments in IT systems, personnel, and facilities. Organizations are analyzing all aspects of their supply chain from a climate change and sustainability perspective, including their carbon footprint, water and waste usage and disposal, and labor policies.  Some companies are being asked by their customers to disclose plans on how they are going to reduce the carbon impact from their operations.

For each category, the paper includes a series of questions that should be considered in the evaluating the impact of climate change and sustainability on these risk areas. 

Click to access the thought paper

Citation: “Five highly charged risk areas for Internal Audit” EY. Dec. 30, 2010.