The purpose of the risk management disclosures in Aotearoa New Zealand Climate Standard (NZ CS) 1 is to enable primary users to understand how climate reporting entities (CREs) are identifying, assessing, and managing their climate-related risks and how those processes are integrated into existing risk management processes. More fundamentally, it demonstrates that a CRE is taking climate-related risks just as seriously as other, more traditional, business risks. 

This year we observed that many risk management disclosures either summarised or cross-referenced the scenario analysis and climate-related risk and opportunity identification processes. For example: 

• When describing the tools and methods used to identify climate-related risks, CREs focused primarily on their scenario analysis process
• When describing time horizons, CREs referred to the time horizons used to identify their climate-related risks and opportunities as part of their strategy disclosures
• When describing value chain exclusions, CREs referred to the parts of the value chain that were excluded for scenario analysis and the identification and assessment of climate-related risks and opportunities, and
• When describing the frequency of the assessment, CREs referred to the annual obligation in the Financial Markets Conduct Act 2013 to prepare climate statements. 

Although these can all be correct disclosures, this led either to repetition between the strategy and risk management sections or siloing of information within each section. This may have been unavoidable in the first year of reporting but leaves plenty of scope for further development. 

As entities move into their year two reporting, they should be thinking about how they can build on their year one processes to further develop and integrate the identification of climate-related risks into their standard risk management processes. This integration is crucial because climate change presents tangible risks to businesses that demand regular consideration. By incorporating climate-related risk identification into standard risk management processes, CREs can ensure they are consistently evaluating and addressing these impacts, thereby enhancing their overall resilience and strategic decision-making.

We have set out below steps that CREs can take to achieve this and to improve their year two disclosures. 

Implement a formal climate risk policy
Having a formal climate risk policy in place will ensure climate-related risks are integrated into all aspects of the business, from operational practices to strategic initiatives, and demonstrates the CRE’s commitment to climate-related risk management. This policy should articulate the CRE’s objectives in identifying, assessing, and managing climate-related risks, and establish a clear framework for risk reporting.
Set a clear risk appetite and materiality framework
Setting a clear risk appetite and materiality assessment framework for climate-related risks enables CREs to define their tolerance for potential losses and impacts associated with the effects of climate change. This process involves determining what constitutes significant risk and aligning it with overall business objectives. By establishing these parameters, CREs can prioritise their resources effectively, ensuring that material climate-related risks are managed proactively and that less significant risks are appropriately monitored. It will also help personnel to understand and identify climate-related risks in the context of their role.
Don’t stop at identification
Identifying climate-related risks is only the beginning. Once CREs identify material climate-related risks, they need to consider mitigation. This involves setting clear mitigation targets, establishing timelines, and assigning responsibilities to ensure effective implementation.
Integrate climate-related risk assessment into strategic planning and decision-making
CREs should integrate climate-related risk assessments into long-term business strategies, project evaluations, and investment decisions to ensure that all strategic initiatives reflect an awareness of material climate-related impacts and opportunities. Rather than relegating these risks to a risk register, CREs should embed climate considerations into their core operations, increasing long-term resilience and profitability.
Upskill employees on climate-related risks
Training employees at all levels about climate-related risks will help foster a culture of awareness and responsibility and can help employees understand how climate change may impact their roles and the business as a whole. Effective training will increase resilience and responsiveness to climate-related challenges.
Assign responsibility for climate-related risks to specific business units
Assigning specific business units the responsibility for identifying climate-related risks engages those most knowledgeable about business operations and challenges in risk management processes, resulting in more accurate reporting and proactive management of risks.

We can help with right-sized solutions. Please get in touch with one of our experts to discuss or speak with your usual Simpson Grierson contact to see how to take this forward.

Special thanks to Isabel van Tuinen for her assistance in writing this series.