Recent changes to the CSRD and the pause to California’s SB 261 may remove or delay climate risk disclosure requirements, but the need for organisations to understand their climate risks remains unchanged explains Muhammed Anwar, director, strategic climate disclosure, WTW; and Julien Hornacek, director, risk & analytics, WTW.

The latest changes to the EU’s Corporate Sustainability Reporting Directive (CSRD) have raised applicability thresholds and postponed reporting for many companies. California’s SB 261 has been stayed, pending appeal. Meanwhile, the UK’s Sustainability Reporting Standards are yet to be finalised.

Such delays may tempt some to pause or deprioritise climate risk management, particularly as economic pressures mount, capital becomes more expensive and supply chains remain under strain.

But regulatory stays should not distract from the fundamentals of climate risk management. The reasons any business needs to understand the climate-related threats to its resilience remain unchanged. For an organisation, that means not stepping back from efforts to grasp the climate risks that could put their business at a disadvantage in terms of investment, supply chain opportunities, the cost of insurance and more.

To help risk and sustainability professionals continue to drive forward the climate and sustainability agenda, it is worth looking at why and how to maintain focus on building an organisation’s understanding of its climate risks, regardless of regulatory changes.

Climate risk is a business risk

Recent CSRD developments have increased applicability thresholds and delayed reporting for many companies. While significant, these changes aren’t the key driver of how climate risk is impacting businesses, your investors, supply chains and customers.

Climate risk remains a business risk. CSRD thresholds and timings have moved, the principles for climate risk management haven’t.

An organisation may now be able to choose to pause on climate risk reporting, depending on its geographic location, but doing so could impact how investors and partners across its value chain view the business.

External stakeholders continue to judge and value a business based on its response to climate-related risks and regulations. Many lenders and investors in particular continue to embed climate and sustainability factors into their own processes and decision-making.

If an organisation can’t demonstrate a detailed understanding of its climate risks and plans to manage them effectively, including commitments to stay on the front-foot by embracing climate reporting requirements, capital may become more expensive or move toward organisations with more persuasive positions on climate risk.

Better disclosure and understanding by a company of its risks, including climate, can also influence IPO success. Even a ‘compliant but minimal’ approach could risk underperforming those peers going further.

Customers may be shifting toward products and services with stronger climate and sustainability stories. Across an organisation’s supply chain, existing and prospective partners may also be evaluating partners based on their climate risk management credentials.

Addressing climate risk as a threat multiplier

Climate-related risks cut across and amplify other risks. They impact a company’s existing assets, revenue streams, workforce, supply chain and directors’ and officers’ exposures.

Regardless of an organisation’s regulatory reporting requirements under CSRD or any other framework, both climate change and the net zero transition are key drivers of the business’ risk profile.

Climate is, at its essence, a set of risks; threats to resilience that can be better understood by using analytical techniques and a wide-angle view on company assets, supply chains and the interconnections across these.

Insurers use risk models to price coverage and offer capacity. If an organisation appears to have a poorer grasp of its risks, climate or otherwise, when compared to peers, this can lead to higher premiums or challenges securing capacity at all.

Climate risk is a risk like any other. To manage it, a business needs information. Effective climate risk management starts with a clear view of both physical and transition risks. Physical risks include extreme weather, flooding and wildfires, while transition risks stem from policy, technology shifts and changing markets.

Advanced analytics and industry-specific data sets will help an organisation understand both its physical and transition risk exposures, translate these into financial impact and prioritise the actions to mitigate, adapt, manage or transfer these risks more effectively and efficiently.

In doing so, business leaders will be able to show stakeholders across the value chain that they are taking informed strategic decisions, while also remaining aligned with evolving regulatory and stakeholder expectations.

Investors, insurers, supply chain partners and customers can then take confidence in an organisation’s response to climate-related volatility, even as uncertainty continues.