Top Six Climate Risk Challenges & Obstacles

APRA released Prudential Practice Guide CPG 229 Climate Change Financial Risks guidance in November 2021 to provide guidance to its regulated entities on managing climate risk and opportunities using a strategic and risk-based approach.

Earlier this year, APRA conducted a survey of APRA-regulated entities to gather information on how they are aligning their climate risk practices with CPG 229.
The survey was voluntary and was aimed at gaining insight into how well medium to large APRA-regulated institutions had formally implemented and documented CPG 229 practices. APRA concluded that the “responses showed good alignment but that there is room for improvement.”

APRA Survey Results

APRA published the results of the Climate risk self-assessment survey in an Information Paper in August 2022. A summary of the findings can be found on its website. The key observations that they noted were:

• four out of five boards oversee climate risk on a regular basis, while just under two-thirds of institutions (63 per cent) have incorporated climate risk into their strategic planning process;
• almost 40 per cent of institutions said climate-related events could have a material or moderate impact on their direct operations;
• nearly three-quarters of institutions (73 per cent) said they had one or more climate-related targets in place, however 23 per cent of institutions do not have any metrics to measure and monitor climate risks; and
• over two-thirds of institutions (68 per cent) said they have publicly disclosed their approach to measuring and managing climate risks, with 90 per cent of those aligning their disclosure to the Taskforce for Climate-related Financial Disclosures (TCFD) framework.

Obstacles to Climate Risk

A second, unrelated report was also recently published; Net Zero: Obstacles and Catalysts for Business Climate Action by ERM and EDF+Business with the results of survey and interviews they conducted to help identify the obstacles faced by companies pursuing their climate goals and some catalysts that may help overcome these obstacles.

This study may provide some insights into the difficulties that the APRA-regulated institutions are facing and account for the shortfall in meeting the expectations of APRA’s CPG 229.

The study tried to look into the reasons why many businesses are falling short in their actions to meet net zero goals. They found a number of internal and external obstacles that are hindering companies’ in reaching their goals.

The three most frequently mentioned internal obstacles were:

• Not knowing how to develop and deliver a climate strategy connecting climate goals with business objectives to drive progress.
• Integration of climate action into core business functions of the organisation to enable them to contribute to climate action.
• Knowing how to measure and manage emissions associated with complex value chains (Scope 3 emissions).

In addition, the three most frequently mentioned external obstacles were:

• Insufficient government support for climate action.
• Suitable technological solutions are unavailable.
• Uncertainty around identifying the appropriate climate-related data modelling tools and guidance to develop climate action plans.

Both these surveys show that companies are trying to take meaningful action to manage climate risks and keep global temperature rise to below 1.5° but need help to do so.

The world is falling behind on the goal to cap temperature rises to 1.5° and limit climate related risks. Finding solutions and implementing climate strategies should be a priority, with or without government support.

Overcoming the Climate Risk Obstacles

The surveyed companies were asked what strategies they believed could be used to overcome the internal obstacles they identified. The top responses were:

• Having a budget that fully supported climate action.
• Senior executive engagement and buy-in.
• Tying performance incentives linked to climate action.
• Developing better internal leadership and upscaling climate knowledge and expertise.

To overcome the external obstacles they identified the need for:

• Improving supporting government policies and regulations.
• Better understanding of widely available climate-related technologies and knowledge of how to utilise those available.
• Investor requirements, financing availability, green bonds etc.
• Government subsidies and incentives.

Starting point

Once a company identifies the need to address climate risk, overcoming the internal obstacles should be the focus of those driving climate risk change in the company. The following 5 steps will start you off and overcome these obstacles.

1. Provide targeted training to the board and C-Suite executives on climate risks, opportunities and how to develop a climate action plan to reduce emissions and manage the risks.
2. Develop goals and the climate strategy with input from,  and participation of, all areas of the business.
3. Set climate goals and publicise them so that everyone knows what they are aiming for. This should be to reduce all greenhouse gas emissions as soon as possible but by 2050 at the latest. Set a target to reduce current emissions by 2030 by, say, at least 50%. (This can be modified if you need to when signing up with a Race to Zero partner or when you have a better understanding of the organisation’s energy use and emissions.)
4. Ensure the board and management support the process including with the provision of sufficient financial and non-financial resources.  Keep them informed of progress.
5. Conduct an energy audit to identify the company’s  baseline energy use.  Remember, you can’t manage what you don’t measure.

1. • Where does the organisation use energy?
   • What type of energy is used? Eg electricity, gas, petrol, diesel
   • Estimate or quantify how much of each type of energy is used
   • Map the supply chains of goods purchased
   • How are products and services distributed?
   • Conduct a scanning exercise to identify if any Scope 3 emissions are material.

Let us help you get to net zero

This can feel confusing and overwhelming. We can help with climate risk management planning, including developing a net zero emissions goals.

Whatever your position, making a start as soon as possible is better than waiting to get it perfect or waiting until you have researched the alternatives. There are a number of initial steps to take while searching for the best fit, the right people and a starting point.

How far do you want to go to minimise the impact of climate change on your business and achieve net zero for future generations? Be more resilient and contact us to discuss your needs