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Climate risk is rising up the corporate agenda. The recently published 2023 TCFD status report highlighted that ‘oversight of climate-related risks and opportunities’ was the recommendation with the largest increase in reporting between 2020 and 2022: 62% of firms analysed now disclose their climate-related risks and opportunities.
However, Verdantix analysis of climate reports for our Climate Benchmark shows that firms are still at the early stages of managing climate risk. For example, the vast majority are some way off fully integrating climate risk into enterprise risk management, and many have not integrated all four of the main IPCC scenarios into their models.
Against that backdrop, Verdantix recently hosted a roundtable lunch for senior sustainability leaders from a range of organizations, including some of the world’s largest banks and insurers, to discuss the question “what is the role of software in optimizing climate risk management?”. Held under the Chatham House Rule, with none of the comments attributed, these were the key takeaways from that conversation:
Market maturity. While climate risk issues command major media attention, most firms are at the very earliest stages of maturity with regards to a defined climate risk strategy.
Board agenda. It may not always be discussed using language of climate risk and sustainability risk, but there was consensus that climate related concerns (and, to a lesser extent, opportunities) are increasingly turning up on Board agendas.
Reporting focus. Most firms taking action on climate risk today are doing so from a reporting perspective and to align/comply with the TCFD framework, rather than truly as part of their enterprise risk management system.
Quantification hesitancy. Although the qualitative identification of climate related risk is happening in some organizations, there is still some uncertainty and hesitancy about calculating or disclosing the financial value at risk.
Climate impact. Some of our represented sectors (such as real estate) are seeing climate risks become climate issues. One example is the inability of certain buildings – particularly older buildings – to cool offices to acceptable temperatures during summer periods. This is directly translating into building valuations and building specification demands.
Software vs services. A number of attendees had actually purchased climate-risk software as a standalone solution (rather than as part of a software and services mix). Although we see software-only purchases in this market as less common, feedback around the room indicated that many consultants lacked the deep expertise that would bring added value, over and above that which already existed within the buyer organization.
Software market consolidation. While there are a number of well-funded software firms in the climate risk management space, most of these have revenues of under $5 million. There was an anticipation from the group that either through buyouts or bankruptcies, there will be consolidation in the market over the next 18 months.
Secondary climate risks. An interesting observation was on the secondary impacts of ‘climate-related’ events, such as the Canadian wildfires creating smog in New York in the early summer. This was so severe as to shut New York airspace – but this type of risk is rarely considered today.
Regulatory frameworks. The TNFD framework is expected to drive further focus on climate risk. There was some discussion around whether TNFD will subsume TCFD. It was also noted that the ISSB is looking to build on the TNFD, but it is still not clear on nature standards for reporting, which makes it harder to build software solutions at this stage.
SBTi challenges. There was a strong sense in the room that the SBTi methodology is a little inflexible and losing credibility in some quarters. While there are limitations in the methodology, it was also agreed that it has been effective in driving momentum around the agenda – and that shifting away from SBTi could create some confusion and stalling in climate and carbon management investments.
We host roundtable discussion lunches once per quarter. If you’re a corporate sustainability leader and would like to join us for one, please contact [email protected], indicating the topics or challenges that you’d be most interested in discussing with your peers.
Niraj is Director, Advisory Services. He is an innovation leader with 30 years’ experience of strategy and policy development, and project and programme management across public, private, and voluntary sector organisations in the UK and internationally. Niraj started his career in the Fast Stream of the UK Civil Service and subsequently worked in banking and in consulting. Over the past decade, he has been focusing on innovation for sustainability, spending 7 years at the UK Government’s innovation agency, Innovate UK, and, most recently, at a deep tech start-up. His qualifications include an MBA from Imperial Business School, and an MSc in Sustainability and Responsibility from Ashridge Business School, and he is a Fellow of the Royal Society of Arts.