CDP Climate Change 2022 Reporting Guidance

(C2.3a) Provide details of risks identified with the potential to have a substantive financial or strategic impact on your business.

Question dependencies

This question only appears if you select “Yes” in response to C2.3.

Change from last year

Modified question

Rationale

Your response to this question will allow data users to see, in one place, details of the risks posed to your organization by climate-related issues, and also the estimated potential financial impact of these risks at the corporate level and your response strategy to manage these risks.

Connection to other frameworks

TCFD

Strategy recommended disclosure a) Describe the climate related risks and opportunities the organization has identified over the short, medium, and long term.

Strategy recommended disclosure b) Describe the impact of climate-related risks and opportunities on the organization's businesses, strategy and financial planning.

Please note: columns 1-7 align with the TCFD recommendations.

SDG

Goal 12: Responsible consumption and production

Goal 13: Climate action

Response options

Please complete the following table. The table is displayed over several rows for readability. You are able to add rows by using the “Add Row” button at the bottom of the table.

[Add Row]

Primary climate-related risk driver drop-down options (column 4)

Select one of the following options:

Primary potential financial impact drop-down options (column 5)

Select one of the following options:

• Increased direct costs
• Increased indirect (operating) costs
• Increased capital expenditures
• Increased credit risk
• Decreased revenues due to reduced demand for products and services
• Decreased revenues due to reduced production capacity
• Decreased access to capital
• Decreased asset value or asset useful life leading to write-offs, asset impairment or early retirement of existing assets
• Increased insurance claims liability [Financial services only]
• Reduced profitability of investment portfolios [Financial services only]
• Devaluation of collateral and potential for stranded, illiquid assets [Financial services only]
• Other, please specify

Requested content

General

• For the purposes of this response, the risks reported should only be those which may pose inherently substantive impacts in your business operations, revenue, or expenditure, regardless of whether or not the company has taken action to mitigate the risk(s).

Identifier (column 1)

• Select a unique identifier from the drop down menu provided to identify the risk in subsequent questions, if required, and to track the status of the risk in subsequent reporting years. Please select from Risk1-Risk100 and use the same identifier in subsequent years for the same risk. For any new risks you are adding, always use a new identifier that you have not used previously.

Where in the value chain does the risk driver occur? (column 2)

• Upstream value chain refers to activities, products and services that are inputs to the activities of your business, sourced from third parties. This may include the regulations and policies applied by governments; the products and services provided by your suppliers (i.e. the supply chain).
• Downstream value chain refers to the third parties benefiting from the outputs, products and services of your business activities. This may be your customers and clients, or the organizations and projects your business invests in.
• [Financial Services only] The options shown will be driven by the organizational activities you selected in C-FS0.7.

Risk type (column 3)

• See explanation of terms for definitions of risk types.
• Note that a selection must be made for both column 3 and column 4. Your data will not be saved if either column is left blank.

Primary climate-related risk driver (column 4)

• Risk driver describes the source of the risk and will depend on the risk type chosen in column 3. Select an option that best describes the primary risk driver of the identified risk from the drop-down menu.
• Note that a selection must be made for both column 3 and column 4. Your data will not be saved if either column is left blank.

Primary potential financial impact (column 5)

• This column refers to the potential financial impact that the risk could have on your organization. The financial impacts of climate-related issues on organizations are not always clear or direct, and for many organizations there might be more than one financial impact associated with a climate-related risk. Select the option from the drop-down menu that you evaluate as having the biggest impact. You can provide additional details on other financial impacts in the column Explanation of financial impact figure (column 14).

Climate risk type mapped to traditional financial services industry risk classification [Financial services only]

• In this column consider how climate-related risks fit into your already existing organizational framework. Consider where in your traditional industry risk framework you classify the potential financial impact of the climate risk. As per the TCFD supplemental guidance to financial institutions, “Banks should consider characterizing their climate-related risks in the context of traditional banking industry risk categories such as credit risk, market risk, liquidity risk, and operational risk.” If an identified risk maps to multiple risk categories, choose the primary risk category.
  • Capital adequacy and risks weighted assets: refers to the minimum amount of capital that must be held by financial institutions in order to reduce the risk of insolvency.
  • Liquidity risk: occurs when a financial institution cannot meet its short-term debt obligations.
  • Funding risk: refers to the risk associated with the impact on a project's cash flow from higher funding costs or lack of availability of funds.
  • Market risk: refers to the possibility of loss resulting from an adverse movement in asset prices.
  • Credit risk: refers the possibility of a loss resulting from a counterparty’s failure to repay a loan or meet contractual obligations.
  • Insurance risk: refers to the possibility of loss resulting from an event(s) that triggers the insurer to pay (a) claim(s).
  • Reputational risk: refers to the risk for negative public perception or to the potential of uncontrollable events to have an impact on a company's reputation.
  • Policy and legal risk: refers to the possibility that legal action will be taken because of an individual's or corporation's actions, inaction, products, services, or other events.
  • Systemic risk: the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy.
  • Operational risk: refers to the possibility of loss resulting from failed processes, systems, human error or outside influences.

Company-specific description (column 6)

• Provide further contextual information on the risk driver, including more detail on the exact nature, location and/or regulation of the effect concerned, as well as any notable geographic/regional examples.
• Be sure to include company-specific detail, such as references to activities, programs, products, services, methodologies, or operating locations specific to your company’s business or operations.

Likelihood (column 8)

• The likelihood of the impact occurring along with the magnitude of the impact are the building blocks of a risk/opportunity matrix – a common method of identifying and prioritizing risk and opportunities.
• The likelihood refers to the probability of the impact to your business occurring within the time horizon provided, which in the case of an inherent risk might be similar to the probability of the climate event itself.
• For example, if the risk relates to a piece of new legislation which has already been prepared in draft form, the likelihood of the impact associated with that risk occurring will be relatively high.

Magnitude of impact (column 9)

• The magnitude describes the extent to which the impact, if it occurred, would affect your business. You should consider the business as a whole and therefore the magnitude can reflect both the damage that may be caused and the exposure to that potential damage.
• For example, two companies may have identical facilities located on a coast in an area which is vulnerable to sea level rise. However, if company A relies on that facility for 90% of its production capacity and company B relies on it for only 40% of its production capacity, the magnitude of a sea level rise impact on company A will be comparatively higher than that on company B.
• It is not possible for CDP to accurately define terms for magnitude as they will vary from company to company. For example, a 1% reduction in profits will have different effects on different companies depending on the profit margins on which they work. Therefore, companies are asked to determine magnitude on a qualitative scale. Factors to consider include:

- The proportion of business units affected;
- The size of the impact on those business units; and
- The potential for shareholder or customer concern.

Are you able to provide a potential financial impact figure? (column 10)

• Your selection will determine whether columns 11,12, and 13 will be presented.
• It is acknowledged that these figures will be estimates.
• If you are unable to provide a figure for a financial impact, you may use column 14 "Explanation of financial impact" to provide a description of the impact in relative terms; for example, as a percentage relative to a stated or publicly available figure, or give a qualitative estimate of the financial impact.

Potential financial impact figure (currency) (column 11)

• Provide a single figure for the inherent financial impact of the risks (before taking into consideration any controls you may have in place to mitigate the impacts). This figure should be in the same currency that you selected in question C0.4 for all financial information disclosed throughout your response.
• An example would be the cost of destruction of facilities from extreme weather (before taking into consideration how much insurance coverage you have).

Potential financial impact figure - minimum/maximum (currency) (columns 12, 13)

• Provide the estimated range for the inherent financial impact (before taking into consideration any controls you may have in place to mitigate the impacts). This figure should be in the same currency that you selected in question C0.4 for all financial information disclosed throughout your response.
• Potential financial impact figure – minimum (currency): Use this field to report the lower point of your estimated financial impact associated with the risk. For example, if the range is from US $5,000 to $50,000, ‘5,000’ should be reported here.
• Potential financial impact figure – maximum (currency): Use this field to report the upper point of your estimated financial impact associated with the risk. For example, if the range is from US $5,000 to $50,000, ‘50,000’ should be reported here.

Explanation of financial impact figure (column 14)

• Use this open text field to explain the figure provided in the “Potential financial impact” (columns 10, 11, 12);
• Describe how you arrived at this figure (or range), including:

- What approach was employed to calculate the figure;
- The figures used in your calculation;
- Any assumption the figure is dependent on.

• If "We do not have this figure" was selected in column 10, use this column to provide a description of the financial impact in relative terms (for example as a percentage relative to a stated or publicly available figure) or give a qualitative estimate of the financial impact. Otherwise, if you have no information about the financial impact, please state “The impact has not been quantified financially”.
• You can also describe here other financial impacts of the selected climate-related risk (other than the main impact identified in column 5), and provide more details on the nature of the impact in case you selected “Other, please specify” in column 5.

Cost of response to risk (column 15)

• Provide a quantitative figure for the cost of your risk response actions. If there are no costs to responding to the risk, enter 0.
• If you cannot provide absolute values, you may provide a percentage value in the “Comment” column (column 17).
• This figure should be in the same currency that you selected in question C0.4 for all financial information disclosed throughout your response.

Description of response and explanation of cost calculation (column 16)

• Provide details of your organization’s response to mitigate, control, transfer or accept the risk.
• Include an example of company-specific risk responses actions (activities, projects, products and/or services).
• Provide an explanation of how the figure for the cost of managing the risk (in column 15) was calculated, including the figures used in your calculation. If you entered 0 in column 15 “Cost of response to risk”, you should still explain how you arrived at a figure of 0, even if the cost is absorbed into business-as-usual activities.

Comment (column 17) (optional)

• You can use this text field to enter any additional relevant information.

Note for oil and gas sector companies:

• In answering the questions above, please consider the impact of national and international emissions targets and how those could affect demand for oil and gas products. Will they lead to your company having a less carbon-intensive fuel mix? Will fuel efficiency standards affect the demand for fuel? Are there other instances where demand is likely to reduce due to regulation?
• Is your company affected by other types of regulation such as restrictions on flaring, or by requirements for a certain level of climate-related performance in order to receive permission to operate and/or as a condition of accessing new oil & gas resources? (e.g. a requirement for carbon sequestration).
• Companies are encouraged to include these drivers in the response to this question and explain how their portfolio of reserves is evolving in response to these drivers (in the Comment column).

Note for electric utility sector companies:

• Electric utilities are asked to consider, among other issues:

- How national and international targets on demand management might affect demand for electricity;
- The impacts of related policies such as building regulations specifying more energy-efficient buildings;
- Policies to increase renewable electricity supply or to support developments that may result in GHG emissions reductions, e.g. CO₂ capture and storage, clean coal technologies and energy storage;
- The impacts of any emissions trading schemes and any emissions reduction targets you have set or with which you have to comply, including the analysis of possible scenarios and their effect on the company;
- The effects on wholesale and retail power prices of carbon prices in the different markets in which you operate and the extent to which carbon prices are passed through, or may in the future be passed through, into electricity prices in the markets, based on current and anticipated regulatory requirements.

Note for auto and auto component manufacturing companies:

• Please consider the financial and strategic implications of current and planned national, regional, and international policies for increasing automobile fuel efficiency and developing “clean” engines for each of the markets in which you operate. You should also consider how other related environmental policies, such as regulations and standards regarding air quality, use of alternative fuels, and sustainable mobility could further impact your business.
• Specifically, you should take into account how climate change policy could impact you in terms of sales, the financial cost of any loss or potential loss of market share, additional costs of complying with regulation and, if applicable, how you have or will pass increased costs down the value chain.

Note for agricultural sector companies:

• Agricultural companies should report on risks that may affect the revenue associated with the agricultural/forestry, processing/manufacturing and/or distribution. These risk are often driven by:

- Physical factors, e.g. extreme weather events that disrupt production/supply of raw materials.
- Changes in regulation pertaining to agricultural, processing, manufacturing, distribution and/or consumption activities.
- Changes in consumer demands and new market trends

Note for companies with coal reserves:

• Companies with coal reserves can refer to CDP Technical Note: Guidance for companies with coal reserves for more information on disclosing demand and stranded asset risk.

Note for financial services sector companies:

• For the purposes of this response, the risks reported should be inherent and have the potential for substantive impacts on your investing, financing, underwriting and/or operational activities, regardless of whether any action has been taken to respond to the risk(s).
• Note that if providing a potential financial impact figure, this figure should represent the financial impact on your business. For example, if reporting a risk of stranded assets, you should report the potential financial impact (such as the write-down or devaluation) of the assets stranding on your balance sheet (before taking into consideration any controls you may have in place to mitigate the impacts), as opposed to reporting the portfolio exposure to those assets.
• Consider providing a description of risks by sector and/or geography, as appropriate. This can be provided in the "Company-specific description" (column 6).
• Both physical and transition risks in your investing, financing, underwriting, and/or operational activities should be considered, including the risk of stranded assets. These are assets that are no longer economically viable as a result of climate-related transition or physical risks.
• Banks:

- Banks should describe significant concentrations of credit exposure to carbon-related assets.
- Additionally, banks should consider disclosing their climate-related risks (transition and physical) in their lending and other financial intermediary business activities.

• Insurance companies:

- Insurance companies should consider climate-related risks on re-/insurance portfolios by geography, business division, or product segments, including the following risks:

- Physical risks from changing frequencies and intensities of weather-related perils;
- Transition risks resulting from a reduction in insurable interest due to a decline in value, changing energy costs, or implementation of carbon regulation; and
- Liability risks that could intensify due to a possible increase in litigation. For example, the risk of an increase in claims for defense costs in relation to directors and officers (D&O) liability.

- Additionally, as an asset owner, please also describe the climate-related risks relevant to your investment portfolio.

• Asset managers:

- Asset managers should consider climate-related risks for each product or investment strategy.

Note for real estate companies:

• Since real estate is a location-bound and a long-term investment, it is highly exposed to climate-related risks. Commercial real estate companies should consider stranding risks - the devaluation or non-performance of assets, thus making them ‘stranded’.
• Stranded assets may be subject to write-downs due to:

- Demand shifts towards sustainable properties, putting pressure on ‘non-green’ assets;
- Higher exposure to acute physical risks (storms, flooding, wildfires, etc.);

Notes for capital goods sector companies:

• All the end markets supplied to by the capital goods sector face increasing regulation and decarbonization targets; from building standards to mandated technologies for power generation. Companies in this sector are therefore indirectly exposed to risks in their value chain, and should consider, among other issues, risks associated with:

- Carbon pricing regulation and stricter emissions constraints on products and services;
- Shifts in end-market demand away from fossil fuel dependent technologies.

Explanation of terms

• Climate-related risks: TCFD divides climate-related risks into two major categories: risks related to the transition to a lower-carbon economy and risks related to the physical impacts of climate change.
• Transition risks

- Current and emerging regulation – policy developments that attempt to constrain actions that contribute to the adverse effects of climate change or policy developments that seek to promote adaptation to climate change;
- Technology – all risks associated with technological improvements or innovations that support the transition to a lower-carbon, energy-efficient economic system;
- Legal – all climate-related litigation claims;
- Market – all shifts in supply and demand for certain commodities, products, and services;
- Reputation – all risks tied to changing customer or community perceptions of an organization’s contribution to or detraction from the transition to a lower-carbon economy.

• Physical risks

- Acute – risks that are event-driven, including increased severity of extreme weather events, such as cyclones, hurricanes, or floods;
- Chronic – longer-term shifts in climate patterns (e.g., sustained higher temperatures) that may cause sea level rise or chronic heat waves.

• Likelihood: The terms used to describe likelihood are taken from the Intergovernmental Panel on Climate Change’s (IPCC) 2013 reports. They are associated with probabilities, indicating the percentage likelihood of the event occurring. It is not necessary for respondents to have calculated probabilities for the risks they are considering, however they can give an indication as to the meaning of the terms:

- Virtually certain: 99–100% probability
- Very likely: 90–100%;
- Likely: 66–100%;
- More likely than not: 50–100%;
- About as likely as not: 33–66%;
- Unlikely: 0–33%;
- Very unlikely: 0-10%;
- Exceptionally unlikely: 0–1%.

• Direct costs: Also known as “costs of goods or services sold”. These expenses can be attributed to the manufacture of a particular product or the provision of a particular service.
• Indirect (operating) costs: Refers to the essential expenses incurred in order to maintain the business including wages, rent, transport, energy (electricity, fuel, etc.), maintenance, and so on. These expenses cannot be attributed to the manufacture of a particular product or the provision of a particular service - they are standard costs that apply regardless of the volume of goods produced.
• Capital expenditure: A measure of the value of purchases of fixed assets such as property, buildings, an industrial plant, technology, or equipment. Put differently, CapEx is any type of expense that a company capitalizes, or shows on its balance sheet as an investment, rather than on its income statement as an expenditure.
• Revenue: Income arising in the course of an entity’s ordinary activities (less returns, allowances and discounts) - before deducting costs for the goods/services sold and operating expenses to arrive at profit (based on the International Financial Reporting Standard)
• Access to capital: Cash flows from sources other than an organization’s sales and other revenues. It includes cash infusions from investors or securing lines of credit with banks and other lenders.

Example response