DEREK SMITH: Climate change risks key board discussion

Continued attention is being paid to climate change. In 2020, billionaires such as Jeff Bezos announced the establishment of a $10m fund to combat climate change. Most recently, in this 2022 first quarter, the United Kingdom - via its Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 and Companies (Strategic Report)(Climate-related Financial Disclosure) Regulations 2022 - now requires corporate entities to disclose climate-related financial information, ensuring they consider the risks and opportunities they face as a result of such changes. Additionally, in the US, the Climate Risk Disclosure Act 2021 was introduced to require similar transparency for public companies.

This article focuses on climate change as a business risk instead of just approaching it from a natural resource perspective. It is generally accepted that climate change creates two primary financial risks: The physical impacts of the changing climate, and risks in the transition to a net-zero emission economy. Transitional risks include policy and the legal environments, technology, markets and reputations. The Board’s responsibility regarding climate-related risk, and the implementation of climate risk assessments within a financial institution’s enterprise risk environment, will now be addressed.

Boards need to talk about environmental risks

Climate change poses financial risks to institutions. First, the board of directors should be able to assess these risks within the firm’s overall business strategy and risk appetite. Second, to assist with illustrating the importance of climate change impacts for businesses, this author interviewed Trevor Johnson, a Bahamian PhD student at North Dakota State University, whose area of research interests includes capacity building in disaster management while considering individual and household preparedness, and holistic recovery.

Mr Johnson explained: “Climate change impacts every socioeconomic sector, especially in a small island developing nation like The Bahamas, where statistics illustrate how interwoven various sectors of our economy are with tourism. The conversation and risk involved with climate change must be discussed.” Third, Boards can use the emergence and importance of climate-related risk to reconsider their approach to assessing readiness and capacity, assessing materiality, strategic considerations, the introduction of new agenda items and, ultimately, deciding on what should be disclosed.

Climate risk assessments

The US Securities and Exchange Commission (SEC) chair, Gary Gensler in his March 21, 2022, statement said: “Investors representing literally tens of trillions of dollars support climate-related disclosures because they recognise that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.” Simply put, investors appreciate the impact of climate-related risk. Therefore, if climate-related risks are not being addressed through a financial institution’s annual risk assessment (ARA) exercise, their ARA may be deficient. Boards and executive management must also appreciate that a robust and adaptive risk assessment can equally identify opportunities as much as help prepare for risks. These opportunities can lead to a potentially positive financial impact on an institution.


In short, in the face of dynamic and inter-connected climate risks and opportunities, Boards must have the right conversations surrounding climate-related risks based on their institution’s nuances. It is essential to assess the inter-connectivity of climate-related risks and opportunities that impact on business operations.

NB: About Derek Smith Jr

Derek Smith Jr. has been a governance, risk and compliance professional for more than 20 years. He has held positions at a TerraLex member law firm, a Wolfsburg Group member bank and a ‘big four’ accounting firm. Mr Smith is a certified anti-money laundering specialist (CAMS), and the compliance officer and money laundering reporting officer (MLRO) for CG Atlantic’s family of companies (member of Coralisle Group) for The Bahamas and Turks & Caicos.


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