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National Audit Office issues guide on climate change risk

Author: ICAEW Insights

Published: 09 Aug 2021

The NAO’s guide will help Audit and Risk Assurance Committees identify, scrutinise and evaluate climate change risks and support them in challenging management on their approach to managing those risks.

The National Audit Office (NAO) has issued a good practice guideClimate change risk: A good practice guide for Audit and Risk Assurance Committees’ aimed at supporting Audit and Risk Assurance Committees (ARAC) in challenging senior management in the public sector. The report is split into four chapters: 

  1. What is climate change risk? 
  2. Expectations of government organisations
  3. How to support and challenge senior management
  4. Key guidance and good practice materials

A further three appendices – complete list of questions, survey results and further reading – make up the rest of the guide.

What is climate change risk

Using the TCFD (Taskforce on Climate-related Financial Disclosures) framework, the NAO has created a risk taxonomy for public sector climate change risks. Different types of risk are split into physical, transition and ‘other’ categories and then further sub-categories include adaptation-related risks and mitigation-related risks. 

In total, twelve risks are identified, such as productivity, financial/valuation and policy/regulation risks. The guide provides a good foundation for the sort of climate risks public sector organisations should be thinking about. 

Expectations on government organisations

This chapter shows a very interesting timeline of the key UK and international legislation, policies, targets and events related to climate change. It provides a clear, one page overview of all the key developments over the last 30 years. 

How to support and challenge senior management

NAO’s guide uses the 8 risk management principles from HM Treasury’s risk management guide, the Orange Book, to explain the key climate change considerations, and what questions ARACs should be asking as well as providing illustrative examples. 

Taking the risk principle ‘integration’ as an example; risk management should be an integral part of all organisation activities to support decision-making in achieving objectives. The guide goes on to state that climate risks must be properly understood - informed by data and quantified using scenario analysis wherever feasible. Once the risks are firmly understood, they should be integrated into the organisation’s strategy. 

A pictorial example of how the NatWest Group have integrated climate challenges into their strategy and purpose and a number of suggested questions complete the section under ‘integration’. An example question for an ARAC to ask is ‘What processes does the organisation have in place to embed climate related risks throughout the organisation?’

Key guidance and good practice materials

A useful page showing where further guidance materials can be found, including our own ICAEW Climate Hub

Henning Diederichs, Manager, Public Sector Financial Reporting, at ICAEW commented: “For those Audit Committee members new to climate risks, this is an excellent guide as it applies both the TCFD requirements but also HMT’s risk management principles to the public sector climate challenges. The practical application of this guide along with the illustrative examples will make this a very useful document. 

“Finance teams should be aware of the questions in this guide to make sure they have the systems in place to be able to respond to these sorts of climate risks appropriately. After all, having the right questions is only the start, a meaningful response and understanding that response is also essential.”

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