Climate change brings evolving and challenging risks for all organisations
9 May 2019
We ask what is the role of internal audit?
According to the World Economic Forum, 5 of the top 10 risks facing the world in the next 10 years are environmental. Whilst acknowledging there are differing perspectives on the issue - the 2016 Paris Agreement is evidence that many agree there is a need for action. What this looks like, the timescales for change and the financial burden are the challenges we all face. In May 2019, government advisory body, Committee on Climate Change, recommended a challenging emissions target for the UK of net-zero greenhouse gases by 2050.
Climate risks are pervasive. It will take more than a one off ‘climate audit’ to give assurance to the board.
Which risk themes are relevant to your organisation? Risk in Focus highlighted some areas although environment and climate change was one of the least audited areas. What assurance are you providing?
1. Strategy
Strategic risk should be the starting point for internal audit. Organisational responses to climate risk (threats and opportunities) will help shape viability and long-term sustainability for the future. How does the organisation’s strategy address the expectations of stakeholders and ensure it understands the interrelation between climate change and its activities? Does the strategy address the rapidly changing reputational impacts, future liabilities, potential new regulations and emerging technologies?
2. Energy
What is the strategy for using fossil fuels - central to the debate on global warming? Is disruptive thinking necessary to reduce consumption? What are the purchase considerations? There is a cost to transitioning to a low-carbon economy, but potentially the reputational cost of merely ‘window-dressing’ could be higher.
3. Travel
Does the travel policy consider ‘green’ credentials? Is travel essential; routine, domestic, overseas? Could it be reduced? Air travel is a concern as its warming effect is almost twice that of carbon dioxide at ground level.
4. Extreme weather
Scientists advise that extreme weather events (cyclones, drought, flooding, wildfires) are becoming more frequent. Is climate resilience considered? Are strategies in place to reduce critical exposures? What about insurance cover? Insurance firms are questioning the reliability of modelling. What cost impact could this have; will some industries, locations become uninsurable in future?
5. Waste management
All organisations now recycle. But does your organisation have a reduction strategy? The lack of global infrastructure for recycling was highlighted when China banned waste imports in 2018.
6. Supply chain
Globalised trade puts organisations at risk of climate disruption in addition to contributing to the climate crisis. Does your organisation understand the true extent of its exposures? How can they be reduced? What risks could a rise in protectionism create? Domestic options are not always viable (labour skills, growing conditions) without innovation or change.
7. Financial Services
Climate change introduces significant financial risk; asset values, currency instability, insurance costs and economic uncertainty. The controlled transition of carbon intensive markets will have major impacts. Long-term shareholder responsibilities impact investment decisions and the attractiveness of assets. As a result, the ability of organisations to access capital will change.
8. Food Industry
A hot topic, whether consumption, wastage or production - agriculture, farming and fishing. What expertise/research is considered as part of your organisation’s strategic planning? How might legislation change?
9. Interconnectivity
Estimates suggest that the tourist industry produces 8% of greenhouse gas emissions; principally transport, retail, food. Can risk impacts be managed more successfully in collaboration/partnership with other organisations? Does this feature in the strategic process?
10. Climate Migration
Longer term scientists predict that a combination of drought, temperature and rising sea-levels will see significant people migration by 2050. Impacts could be seen in the viability of locations for factories and offices, access to labour and water shortages for production processes. Has the clock started for this type of assurance?
Sir David Attenborough and teenage activist Greta Thunberg speak clearly about today being the window for meaningful action. What technical guidance do you need to provide climate assurance? Email the technical team at technical@iia.org.uk and watch out for future guidance.
