Risk & Compliance

32% of Companies Don’t Consider Climate Change in Risk Analysis

Finance was one of the least likely departments to participate in climate change risk management, according to new data.
32% of Companies Don’t Consider Climate Change in Risk Analysis
Photo: Paul Souders

As incoming environmental, social, and governance (ESG) regulations continue to be a preparation point for proactive executives, not all components are being treated equally. Recent findings by the Institute of Management Accountants (IMA) indicate that the “environmental” component of ESG is increasingly ignored in corporate preparation, risk analysis, and planning.

When respondents (over 500 coming from different areas in corporate finance) were asked whether their organization’s risk management process covers risks related to climate change, nearly a third of respondents (32%) said their organization doesn’t consider climate change in their enterprise risk management. 

Finance’s Focus on the S and G 

Finance was reported as one of the least likely departments to participate in climate change risk management. According to findings, nearly 20% of respondents said finance teams have no participation in environmental considerations of risk management, second only to human resources. 

Responses also found that CFOs have a significantly shorter-term focus when it comes to risk analysis in comparison to other leadership roles, a possible reason for finance chiefs’ main focus on the ‘governance’ part of ESG. Although aspects such as rising sea levels and global temperatures may have an impact on their organization’s long-term well being, corporate preparation and adherence to incoming regulation appears to be the priority for finance teams.

Just like CFOs, the CEO is also credited for this short-term focus on risk analysis, according to surveyors. When gauged on the go-to person for climate change, CFOs ranked middle of the pack, while their CEO, with the same risk analysis time frame, was an overwhelming favorite as an organizational climate risk resource. 

Majority of Businesses Ignore Sustainable Business Data

Collecting and applying accurate data should be at the forefront of any proactive executive’s decision-making process, including ESG regulations and requirements. Despite using data in many other tasks within corporate finance and beyond, a majority of respondents (51%) said their companies do not use any type of sustainable business information in their decision-making processes. 

Within the minority of those who said their company is leveraging sustainable climate data in the decision-making process, over a quarter (26%) reported their companies use this type of information to identify and assess risk. Twenty-one percent report use by senior management for financial planning and analysis purposes, while nearly a fifth (18%) of respondents said they use the data to gauge their own progress in their ESG strategies.

Sustainable business information usage in managerial compensation was the least selected response, suggesting that executives are unlikely to be financially rewarded for superb ESG initiatives and accomplishments. 

Small Business Lagging Behind Corporations 

Despite a majority of the world’s largest companies releasing sustainability reports, small businesses — which make up 99% of registered businesses in the United States — are lagging behind. Due to factors such as pandemic-induced economic woes, struggling labor markets, and the rising costs of capital, data indicates ESG may turn into a roadblock for small businesses looking to get back on their footing in post-pandemic markets.