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Updated on October 13, 2023
There is every reason to encourage SMEs to include the environment and good governance practices in their risk management strategy. Their long-term survival depends on it.
In the past year, there has been a marked increase in the number of companies reporting on their sustainable development and carbon neutrality initiatives.
Your organization needs to include environmental, social and governance (ESG) criteria in its risk assessment to keep pace with the market, as it faces government regulations and increasing demands from customers and business partners.
The measures your company implements now and the actions it takes will have a positive effect on its continuity, as well as on your performance and competitiveness.
What are the risks for your organization?
Climate risks can occur over an extended period and are likely to intensify over time, especially if the global economy experiences a disorderly transition.
They can create financial risks, such as credit, market, insurance and liquidity risks. They can also create strategic, operational and reputational risks. In severe cases, climate risks can threaten the long-term viability of an organization’s business model.
Not all risks are the same. As a first step, you need to determine which ones will affect your operations in the short, medium and long term. Then, in order to reduce their impact, you need to develop a plan to address them in an appropriate and timely manner.
Here is an overview of the different risks that companies, including SMEs, have to deal with. They fall into several categories.
Physical risks
These are financial risks resulting from the:
- increasing severity and frequency of extreme weather events associated with climate change (i.e., acute physical hazards);
- gradual long-term changes in climate (i.e., chronic physical hazards);
- indirect effects of climate change, such as public health impacts (e.g., morbidity and mortality effects).
Transition risks
Transition risks refer to the financial risks associated with the process of adjusting to a low greenhouse gas (GHG) economy. These risks can arise from:
- Current and future government policies, laws and regulations to limit GHG emissions;
- Technology advances;
- Market and customer expectations regarding changes in a low GHG-emission economy.
All levels of government are planning to introduce new ESG legislation and regulations in the near future. North American capital markets authorities will also be strengthening ESG requirements.
For example, the federal government will impose ESG and climate risk disclosure requirements on institutions under its jurisdiction by 2024, which could have an impact on your business.
Accountability risks
Physical and transition risks can also result in accountability risks, such as, the risk of:
- climate-related claims under liability insurance policies;
- lawsuits being filed directly against financial institutions for failing to manage climate risks.
How can you reduce the impacts?
The better prepared you are for what’s coming, and what’s already underway, the better your business will be equipped to continue operating. Here are the essential steps to successfully implement effective ESG measures.
Analyze your situation and market
You need to begin by asking yourself the right questions about your industry’s expectations, current regulations and market requirements:
- Are you feeling pressured by your business partners or competitors?
- Are you required to report, either legally or to meet investor requirements?
- Does your customer base or market require a commitment to carbon neutrality?
Determine your frameworks
Determine which frameworks are most appropriate for your business context. What regulations apply to your organization and what requirements do you need to comply with (GCIF framework, CDP standards, SASB standards, etc.)?
Develop your strategy and game plan
Next, you need to assess what your true climate footprint is and how it affects your financial performance and, of course, what offsetting solutions are available.
- Calculate your organization’s climate impact during production and operations (carbon emissions, water use, waste management, etc.);
- Verify what physical risks your company faces;
- Analyze the financial implications (costs, programs, subsidies, etc.).
Develop your game plan by prioritizing short-, medium- and long-term actions.
Track and communicate information
Track performance indicators to verify your action plan’s results and progress. This will allow you to make adjustments along the way. Don’t forget to communicate your strategy and results internally and externally.
Get support
To help you make the right decisions, the assistance of an expert could be useful. This expert can inform you about current regulations and the measures you should take to be in step with your market.