The World Economic Forum’s Global Risks report is a good barometer for tracking what is top of mind among experts from industry, government, academia and civil society on an annual basis. Before 2011, for example, there weren’t any environmental concerns among the top five risks in terms of either likelihood or impact.
However, in 2011 there was a marked shift in the world’s perception – four of the top five risks by likelihood were linked to the environment and climate change. In terms of impact, climate catastrophes was viewed as the second-highest impending risk.
In the 2024 edition of the report, five of the top ten global risks ranked by severity over a ten-year timescale were linked to the environment, with the premier risk being extreme weather events.
Traditionally, physical climate-related risks – such as wildfires, floods and droughts – tended to fall under the risk management function’s remit, according to Torolf Hamm, Head of Physical Risk at WTW’s Climate Practice.
“Disclosure requirements that are emerging in many jurisdictions, such as the EU’s Corporate Sustainability Reporting Directive (CSRD), can be linked back to risk management,” says Hamm.
However, the advent of reporting regulations has led to treasury potentially playing a bigger role in a corporate’s sustainability strategy, according to Gustaf Påhlman, Head of ESG Advisory within SEB’s Financial Strategy Unit, which sits with the bank’s client relationship managers.
“As ESG regulatory requirements increase, companies are looking to find the best function internally to manage the vast reporting going forward, and treasury has done this type of reporting for many years. Therefore, some treasurers are finding themselves at the centre of reporting on these matters as well,” says Påhlman.
“Many are hiring their own treasury resources to be responsible for the sustainability topic – which is a significant change over the past five or so years,” he adds.
Joanna Bonnett, Group Treasurer at Straumann Group, which manufacturers dental implants and specialises in related technologies, agrees that treasurers have a role to play. “Treasurers need to understand the corporate sustainability message and company targets, as well as ensure that they have the right financing at the right price point for that business,” she says.
While the treasurer may not be the specific function looking at physical climate risk – more likely it is the risk management, corporate development, or estate and infrastructure team – treasurers are naturally interested at this juncture. Bonnett – who participates in the UK’s Transition Finance Market Review, which aims to ensure that debt products are available in the marketplace for treasurers to access – believes that treasurers need to be able to translate the corporate thinking into a coherent message for the financial markets.
“It is probably time for treasurers to get more involved and understand what’s happening in the business, not only about sustainability, but more specifically about climate change and the risks it poses for their company,” she adds.
The role of insurance
Many, though not all, treasuries have insurance within their remits, so having a deep understanding of the sector and potential risks that climate change poses, such as stranded assets or an uninsurable business model, is required. Some treasurers are already having challenging conversations around this topic, Bonnett reports.
Insurance relates to the financial impacts associated with insurable risks, such as extreme rainfall and hurricanes. These financial impacts are evolving because of the frequency and severity of climate change events, as well as the impact on the wider supply and value chain, according to Hamm.
For example, in 2021 European water utility companies were struggling with widespread flooding in Germany, the Netherlands and Belgium. While they were managing their own assets well, third-party liabilities emerged when excessive rainfall hit their reservoirs.
In some cases, the utilities had to conduct emergency drawdowns to release the pressure, which then caused flooding elsewhere and impacted assets in the surrounding areas.
“Many companies don’t have amplifying effects on their radar,” Hamm says. “We recommend that they should start looking beyond their organisational boundaries to understand the wider context how these amplifying effects could evolve.”
In addition, double materiality is an emerging challenge in Europe, as under the CSRD organisations will be required to look beyond the impact on their balance sheet to how they are impacting the environment.
Treasurers need to understand the corporate sustainability message and company targets, as well as ensure that they have the right financing at the right price point for that business.
Joanna Bonnett, Group Treasurer, Straumann Group
“A risk manager looking to build resiliency against a flood risk, for example, may have the option of a flood wall or a nature-based solution, which may be a better way forward [for the environment] even though it is more expensive. But how do they fund this?” asks Hamm.
He reports that some companies are exploring using a captive insurance strategy for mitigating financing risk, for example, in the event that insurance becomes harder to access or too expensive. A captive can be a risk-financing vehicle that builds up surplus over time to help pay for more catastrophic risks, such as floods or droughts.
In the context of physical climate risk, Hamm suggests scenario testing – where companies stress test their physical assets and value chain against a climate scenario – is a good first step to visualise and provide strategic insight into where potential issues could arise.
He also recommends combining parametric solutions, which pay out when policy triggers are met, with traditional insurance, particularly to cover assets beyond company boundaries. Certain key suppliers, for example, might be impacted by physical climate hazards more often than in previous years. “It is possible to create more resiliency through the use of parametric solutions,” he adds.
Stranded assets
The new regulatory requirements are forcing all companies to look into whether they have exposures or impacts to climate change and nature. For example, the CSRD comes into force in 2026, while the Corporate Sustainability Due Diligence Directive is being applied to the largest companies in 2027, with a rolling implementation deadline for smaller firms.
Asset management and liability is part of an evolving landscape, when considering the risks and/or opportunities arising from the transition to a sustainable economy. “If you’re not transitioning in the next ten years or so, then it’s too late. Doing nothing isn’t an option anymore,” says Hamm. “If a treasurer isn’t involved in the changing thought process that everyone is undergoing, then they are missing the boat.”
Stranded assets are an important issue, according to Hamm. He advises treasurers to review their portfolios, as the footprint and type of assets may evolve in the coming years due to the transition to a low carbon economy. For example, WTW helps clients look at their real estate assets, especially at the investment stage, to determine whether they are fit for purpose.
“From a transition perspective, the property may already be outdated and require retrofitting. In addition, the market value may drop due to the higher frequency and severity of floods, which is a big topic in the UK,” explains Hamm. “Due diligence needs to look at future climate conditions.”
In the real estate space, where SEB has seen the most progress in terms of transparency, many companies are now conducting physical climate risk assessments property by property, to understand what capital will be needed to renovate the property so that it doesn’t become a stranded asset, according to Påhlman.
Treasury or risk function?
In Bonnett’s opinion, climate risk – as in stranded assets – doesn’t sit within treasury. “The financing attached to a stranded asset does, but not the actual asset,” she says.
However, treasurers need to understand physical climate risk from a lending perspective, she argues. “If, for example, a treasurer at a large agribusiness is not able to finance a specific crop, then what will the company do with the land? Will it need to suddenly shift business models, or is treasury already talking to the banks about transitioning and selling those stranded assets?” she says. “One company’s stranded asset may be a lucrative asset for another business. It is important for treasurers to be proactive and forward thinking.”
Mustafa Kilic, CEO of consultancy firm Pirimo Risk Management Services, has had experience on both sides of the divide when he was head of regional treasury and group risk and insurance manager at a large European manufacturing company.
In 2007 he led the team building the corporate’s first enterprise-level risk function. “While climate risk wasn’t at the top of our risk agenda, we did have oversight of it, as well as catastrophic and cyber risk,” Kilic says.
“Our primary goal was to ensure operational continuity, chiefly by mitigating the risk of relying on single suppliers for specific components. For example, one Japanese manufacturer produced 100% of our condensers, a critical refrigerator component.”
We promote the circular economy because it is one way to tackle environmental challenges and future proof the company in light of physical climate change risks.
Gustaf Påhlman, Head of ESG Advisory, SEB
A tsunami hit Japan following an undersea earthquake in March 2011, resulting in the Fukushima nuclear disaster. As a result, the Japanese supplier couldn’t provide any components for more than half a year.
“Because we had already diversified our suppliers, we had negotiated prices, conditions and quality approval processes, so all the agreements were in place and we could continue [operating without disruption].
It was estimated that this decision saved the company almost a year’s earnings,” Kilic says. While not strictly a climate-related shock, he argues that the same methodology can be applied to physical climate risk in supply chains.
He believes that the responsibility for mitigating weather-related risk should sit with the risk manager, due to the role’s complex and expanding remit.
“At that time, I was in the treasury and managing our risk before becoming group risk manager. However, now risk is much more complicated than ever before – it’s not just a side job,” he says.
“Previously, treasury was involved with risk management through insurance policies, but today risk management is much more than an insurance policy.”
At the same time, Kilic believes that there must be some people inside treasury focusing on enterprise level risk. He also advocates strong collaboration between the risk function and treasury, finance, commercial, logistics and so on.
The next step
In its advisory service to clients, SEB is trying to flip the discussion from discussing reporting and a company’s environmental footprint, for example, to looking at how changes in society, technology, regulation and prerequisites for doing business will impact its financial performance.
“Regulation is picking up on that outside-in impact scenario, as seen in the CSRD’s double materiality assessment,” says Påhlman.
In addition, the Swedish bank is engaging with its clients on the circular economy topic, which treasurers find more tangible and perhaps easier to discuss compared to biodiversity, for example. This is important for the next iteration of the corporate sustainability strategy.
“If the focus on carbon emissions was effectively ESG 1.0, companies are now moving onto 2.0 or 3.0 and taking a longer-term perspective on biodiversity, water and so on, which are issues created and/or impacted by climate change,” says Påhlman.
To this extent, companies need to figure out how to deal with the potential scarcity of the raw material that they are currently dependent on.
“We promote the circular economy because it is one way to tackle environmental challenges and future proof the company in light of physical climate change risks,” he says.
