The United Nations Framework Convention on Climate Change’s COP 29, dubbed the “Finance COP,” emphasised the critical need for mobilising climate finance to support the transition to a low-carbon economy, adapt to climate changes, and build resilience against future climate shocks.

Recognising climate risk as a priority, the international investment community requires robust climate data to focus on climate opportunities and governance. This focus underscores the urgency for all stakeholders to proactively engage in climate-related disclosures and risk management.

Climate shocks are becoming increasingly frequent, and their surprise factor can be mitigated by understanding and addressing climate-related risks. Transparency International reports that Pakistan loses $4 billion annually due to climate change-induced events.

To manage and prepare for these impacts, countries must proactively engage in identifying climate-related risks. Pakistan has committed to reducing carbon emissions through its Nationally Determined Contributions (NDCs), and achieving this goal requires collaboration among all stakeholders, including policymakers, investors, financiers, and consumers.

As financial losses escalate due to climate change, businesses must increasingly identify and manage associated risks to survive

The Global Natural Assessment Report highlights that direct economic losses from storms and wildfires in 2023 were over 40 per cent higher than the historical average. The Intergovernmental Panel on Climate Change warns that the impacts of climate-related events will intensify once global temperatures rise by 1.5°C above pre-industrial levels.

A recent Foreign, Commonwealth and Development Office report estimates that inaction on climate change could cost Pakistan’s economy $250bn by 2030. From a business perspective, these losses affect financial balances, leading to diminished asset valuations and increased loan defaults.

Climate-related events impact multiple businesses and sectors, affecting the macroeconomy. For example, property damage can decrease asset valuations, impacting regional property prices, while business interruptions can lead to product shortages and price increases.

A single event can create operational and market risks, which then transmit into the financial sector as credit, underwriting, and liquidity risks, affecting a company’s ability to borrow.

As climate change impacts and financial losses escalate, businesses’ survival will increasingly depend on their ability to identify and manage associated risks. Stakeholders will evaluate how well a company integrates processes to prepare for future climate shocks within its long-term strategy.

The global shift towards a transition to a low-carbon economy with ambitious emission reduction targets requires organisations to adapt to policy changes, technological advancements, and market shifts. The pressure to transition to a lower-carbon economy is significant. The transition risks can become material when they involve capital costs. A better understanding of physical and transition climate-related risks has led to mandatory disclosures on how companies account for these risks.

In Pakistan, select companies are expected to highlight physical climate-related risks in their disclosures and address these impacts in their financial reporting by 2025, which will expand to include a wider range of companies by 2027, depending on the legal form. Risk management involves measuring, managing, and evaluating a company’s exposure to uncertainties, ensuring that climate considerations are financially material.

The International Financial Reporting Standards (IFRS) S2, developed by the International Sustainability Standards Board, mandates that companies disclose information in four key areas: governance, strategy, risk management, and performance metrics and targets.

These disclosures require a strategic overview of governance processes, controls, and procedures for managing climate-related risks and opportunities, highlighting long-term positioning. Companies must report on Scope 1 and Scope 2 emissions (from operations and grid electricity) and carbon emissions throughout the value chain.

To effectively curb emissions, transparency regarding current emissions and reduction plans is essential. This allows policymakers, investors, and customers to understand companies’ decarbonisation approaches. The initial step involves conducting a gap assessment and creating a transition plan to meet climate targets, manage climate-related risks, and support the broader climate transition.

This process aids decision-makers across the ecosystem, including investors, providers of innovative climate solutions, customers, and other partners in the value chain. However, many companies may find the entire process challenging, as it requires a new direction. There is a need for policy support to help businesses manage capital costs, access markets, and integrate into low-carbon value chains.

According to Transparency International, the current climate governance frameworks at the policy level need to be strengthened with openness, transparency, community inclusion, and proactive disclosure of information.

Given the global impact of climate change, there is a heightened focus from all stakeholders to address this issue. For Pakistan’s private sector to access capital, it must align its disclosures with global best practices, such as IFRS S2.

Policymakers play a crucial role in building confidence through transparency and can integrate policy planning and meet international stakeholders’ requirements. However, all stakeholders need to collaborate to effectively mobilise climate finance, mitigate risks, and build a resilient future for Pakistan.

The writer is the Head of Initiative, Centre of Excellence in Responsible Business at the Pakistan Business Council

Published in Dawn, The Business and Finance Weekly, December 2nd, 2024