UNEP FI’s 2024 Climate Risk Landscape

Our key takeaway: Integrating a just transition lens to climate risk assessments is important, says the United Nations Environment Programme Finance Initiative (UNEP FI). Why? Because the energy transition is already impacting people and the planet, such as the social impacts related to carbon credits, the impact of renewable projects on ecosystems, and job losses in high-emitting sectors. And an energy transition that fails to respect people and protect the planet will be ineffective and unsustainable. Despite the importance of the just transition, existing climate risk tools seldom assess social considerations as part of their climate analysis. And the ones that do lack accuracy and consistency. The report issues a call to action: for data vendors to create, and the financial community to rally around, enhanced metrics and tools that accurately measure the human rights impacts of climate adaptation and mitigation efforts. Doing so “can play a pivotal role in guiding companies towards a truly inclusive and equitable approach to business practices and can facilitate target setting and progress tracking.”

The United Nations Environment Programme Finance Initiative (UNEP FI) published 2024 Climate Risk Landscape Report (April 2024):

• Recent trends in the climate risk assessment landscape: The report highlights key opportunities and progress in relation to climate risk assessment tools. These are: 1) “[e]nhanced synergistic collaboration through partnerships across industries”; 2) “[e]merging functionalities for regulatory compliance and stress testing requests; 3) “[i]ncreased integration of Artificial Intelligence (AI) technologies in climate tools”; 4) “[o]pen-source innovation & enhanced data access through collaborative platforms by data and tool providers”; and 5) “[e]nhanced data input, refined assumptions, diverse functionalities and coverages toward comprehensive analysis."
  

• The importance of just transition to climate risk tools: While the report emphasises the importance of taking a social lens in ESG analysis, the challenge of quantifying and understanding these risks is also recognised. For instance, companies typically disclose the gender percentages of their workforce or on their boards as one way to demonstrate their progress in diversity, equity and inclusion (DEI) efforts. While useful, numerical representations only form part of the broader picture. Investors will need more detailed information on DEI efforts, as well as data that shows how a company “performs on broader diversity, equity, and inclusion measures, such as race, sexual orientation, age, and disability.” In addition, the report emphasises the significance of taking a social lens in the context of climate change: “[t]he ‘S’ in ESG is pivotal to ensure a just and equitable climate transition, thus ensuring climate action addresses both mitigation and adaptation in ways that are as fair and inclusive as possible, leaving no one behind.” Despite this, a BCG survey showed that although 90% of respondents believed social considerations to be pivotal in climate actions, only 31% of respondents deemed social considerations to be influential in actual decision-making behaviours. The report issues a call to action: for vendors “to develop further specific key performance indicators (KPIs) to effectively measure the social impacts of companies’ operations.” This is key to ensure a just transition: “[e]nhanced metrics and tools can play a pivotal role in guiding companies towards a truly inclusive and equitable approach to business practices and can facilitate target setting and progress tracking.”
  

• Recommendations to better utilise climate risk tools: The report highlights several best practices when it comes to utilising climate risk tools. These are grouped into four main categories: 1) Accessibility across departments, which means “[making] climate tools and their results readily accessible to all relevant departments, such as customer engagement, ESG & sustainability, risk management, legal, and compliance teams”; 2) Integration with existing solutions and metrics. This entails “integrat[ing] climate tools with current accounting and risk management systems and metrics for ongoing, updated risk assessments”; 3) Holistic risk evaluation, which means “[conducting] a thorough evaluation of the institution’s risk profile, considering the additional implications of climate risks to support effective decision-making”; and 4) Capacity-building and internal tool development. This encompasses “assessing open-source data and platforms to pinpoint critical hotspots; then integrate external climate tools as foundational resources, while developing internal capacities and custom tools tailored to the institution’s specific needs.”