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Six ways to embed climate change risk management

Author: ICAEW Insights

Published: 28 Oct 2021

Company directors need to treat climate change risk as a key risk to their business, and do so as a matter of urgency, a joint report from the Chartered Institute of Internal Auditors and British Standards Institution shows.

The guide, Harnessing internal audit against climate change risk, cites six ways company directors, supported by their risk managers and internal audit specialists, can prioritise climate change in their risk oversight and management to start making a difference. 

They are for company directors to:

  1. Start conversations about how they will monitor and assure actions being taken on climate change preparedness with risk managers and internal audit teams.
  2. Use their leadership position, through the Audit Committee, to determine the required assurance from the inside out and to direct internal audit activity in relation to climate risk.
  3. Start by asking internal audit to undertake a climate risk assessment to address: how climate change fits into the business’ mission and purpose; the long term strategy, organisation and governance; and the information provided to stakeholders incorporating both non-financial and financial reporting.
  4. Plan for internal audit activity to focus on climate-related commitments, plans, milestones and actions, providing assurance that the underlying processes and controls that support the data are robust and operate as intended.
  5. Prepare for the physical effects of climate change and the requirements of new laws and regulations on sustainability using the expertise that risk managers and internal audit can provide.
  6. Ensure the business is ready to meet mandatory climate related financial reporting requirements, including the imminent requirement for TCFD reporting in FCA regulated organisations which will become compulsory in 2022.

ICAEW spoke to Carolyn Clarke, chief executive and founder at Brave Consultancy, and part of the team behind the Chartered Institute of Internal Auditors’ (CIIA) report, who says the report is a call to action to company directors, led by the Audit Committee Chair, to work with internal audit and risk managers to ensure the organisation is ready to address climate change risk with confidence.

“We have a real responsibility to ensure that we are prepared with internal functions able to identify, manage, mitigate, monitor, assure, and report on all aspects of climate and environmental risk,” says Clarke.

Managing climate change risk

With COP26 in mind, climate change risk has become the most pressing issue of our time, she adds, becoming a strategic issue that should be integral to a businesses’ process.

“We ought to be able to do this from the inside out rather than relying solely on obtaining a third party or an external audit opinion or viewpoint. 

“It’s important that organisations have lined up their plans for implementing strategic change to manage climate risk. Directors must feel confident that climate related risk is being assessed and managed properly, and that the processes and outcomes can be disclosed externally. If the data is of importance to investors and wider stakeholders, directors must have an equivalent level of confidence in that data to the confidence they have in their financial information, says Clarke.

“If stakeholders place emphasis on the information that you are holding, it’s critical that the information is reliable.”

How to get started

Some ICAEW member’s clients may be struggling to get started with this process. Clarke suggests focussing on the framework provided by the Task Force on Climate-Related Financial Disclosures (TCFD).

“The beginning point is to be clear about your strategy, and what you need and want to say about TCFD reporting. Then break down your strategy such that it is aligned with the governance, risk and control processes and functions so you can build confidence,” says Clarke.

In the future there will be comparable reporting frameworks and this will make it easier to explain how organisations are managing climate change risks, says Clarke, but this is not a reason to wait.

“If you step back and really think about the company’s approach and risks it will be possible to provide meaningful non-financial data and narratives,” she says. “Directors have a responsibility to objectively monitor climate change responses today so this is not something that they or their internal audit teams can afford to delay.”

Read the full guide here: Harnessing internal audit against climate change risk: A guide for audit committees and directors

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