![]() ![]() The implications for the investing public, through their pensions and mutual funds, are potentially severe.ĭespite the obvious importance of this area, “climate change” is not mentioned by name in accounting and auditing standards, although the standard setters would say that its effects are covered – just like any other risk factor that is financially material to a company. If information on the potential impact of material climate risk isn’t complete and accurate, investors could unknowingly allocate their capital to businesses exposed to climate risk – and ultimately could be left with worthless investment portfolios if that risk is badly managed. Savvy investors, therefore, need information on the financial implications of material climate risk to the businesses they invest in. In extreme cases, businesses that cannot adapt will fail. ![]() Profits, cash flows, liquidity and solvency can all be impacted. The resulting financial implications also vary widely – from the operating and capital expenditures needed to make changes within the business, to shutting down factories because of reduced customer demand or legal prohibitions. The costs of managing climate risk can come in many forms, and range from making operational modifications for improved energy efficiency to relocating operations to reduce exposure to, for example, wildfires or floods to completely shifting the business model to one that is less carbon intensive. It’s no wonder, then, that investors around the world have been growing increasingly concerned about the far-reaching economic implications of climate change and, as a consequence, are intensely focused on business’ responses. In April, the UN Intergovernmental Panel on Climate Change (IPCC) released its latest report, reiterating its previous findings: that climate change is a grave and mounting threat to our well-being and a healthy planet that severe impacts are already happening and that today’s actions will shape how people adapt to climate change and how nature responds to increasing climate risks. The planet is already experiencing extreme weather events which wreak havoc, including hurricanes, blizzards, floods, wildfires, heat waves and droughts these of course are increasingly seen to be linked to climate change, with the dangerous consequences to society and business expected to worsen in the coming years. While society currently faces a multitude of calamities - the Covid-19 pandemic, wars, poverty, economic disruptions and inequities, and social injustices - climate change has the potential to exacerbate each of them. Climate change is the most critical issue facing the world today. ![]()
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