Section 2: Stakeholder insights and research By identifying and proactively addressing risks and opportunities, all enterprises protect and create value for their stakeholders, including owners, employees, customers, regulators, and society overall. The rationale is that one of the greatest dangers to any organisation is not recognising a threat until it is too late. It is no longer acceptable that an organisation finds itself in a position whereby unexpected events that could have been anticipated cause financial loss, disruption to normal operations, damage to reputation, loss of market presence or cause loss of human life. There is an expectation from key stakeholders, including regulators, that risk management frameworks will need to address risks from climate change and therefore organisations will need to enhance their frameworks and risk maturity. This extends from identifying and reporting climate change risks to boards to supporting strategic decision making. This is both a major challenge and an opportunity for risk managers. In July 2020 Sam Woods, the Deputy Governor for Prudential Regulation and Chief Executive Officer of the UK Prudential Regulation Authority, wrote to all CEOs of financial institutions. His letter stated: “Climate change represents a material financial risk to regulated firms and the financial system. Whilst the Covid-19 pandemic is a present risk and an understandable priority for firms, minimising the future risks from climate change also requires action now. We continue to work on understanding and mitigating these risks”.7 The letter, although directed at financial services organisations, is a good reference for risk managers from all industries in providing guidance. One of the key comments under the heading “risk management” is that risk leaders should seek to consider the far-reaching breadth and magnitude that climate change represents, distinguishing between financial and non-financial risk management, corporate responsibility (particularly in respect to reputational risk), customer behaviours and legal risk. In this section, we, therefore, guide how to develop a climate ‘risk radar’ for identifying both risks and opportunities through the use of stakeholder mapping. Stakeholder insights and mapping In developing an organisation’s climate risk radar, it is important to seek out information from outside the organisation, for example by using PESTLE analysis covering Political, Economic, Sociological, Technological, Legal and Environmental issues. A PESTLE analysis describes a framework of macro-environmental factors used in the environmental scanning component of strategic management, to gain insights in respect of global trends such as climate change. One of the main benefits of doing this is to build consensus amongst a range of stakeholders about future threats and opportunities and how to tackle or profit from them. > Threats: What is emerging on the horizon which could adversely affect future commercial or other defined success factors? > Opportunities: What trends and directions do data and information gathering reveal and indicate as areas of potential competitive advantage in the future marketplace? Boards need input from risk professionals on the risks from climate change and they need to be able to address and oversee these risks within the firm’s overall business strategy and risk appetite. Effective integration into the risk appetite framework and supporting metrics will be of particular importance. In developing an organisation’s risk radar different tools and techniques can be used to identify risks and opportunities. In this section of the guide, we provide a generic list of stakeholders that should be considered.
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PRA – Sam Woods Deputy CEO PRA - Letter to CEOs July 2020
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