While many companies are already under pressure to understand how climate risk affects their businesses, smaller to medium-sized companies are facing added pressure due to limited resources.
In short, climate-related risks refer to potential negative impacts of climate change towards an organisation. From increased risk of port infrastructure damage to additional operating cost, shipping companies face adverse effects of climate change. To help other smaller shipping companies to navigate climate risk, here are some tips from sustainability specialists at Paia Consulting on how to integrate climate risk into your shipping business.
Firstly, is it important for smaller shipping companies to identify their climate risk?
Climate risk does not treat small shipping companies differently. The systemic nature of climate risk requires both small and large shipping companies to understand and assess its implications. This is true in the case of physical risks such as acute weather events that cause port disruptions, and regulatory risks associated with enacted or impending climate-related industry targets.
Smaller shipping companies are also affected by shifting expectations in a net zero economy. Customers may look for service providers that can provide low carbon solutions, and investors may look for companies with stronger energy efficiency performance.
Assessing climate risk can already be a huge challenge for many, what can smaller shipping companies do for a start?
The Taskforce for Climate-related Financial Disclosures (TCFD) will give smaller shipping companies key considerations and steps they can take to assess their climate risk. By focusing on the core elements of Governance and Strategy, shipping companies can lay the groundwork for climate risk assessment by securing top management buy-in, enabling them to build the knowledge and internal capacity to assess their climate risks through scenario analysis.
On the other hand, how can financial institutions and investors incorporate climate risk into their lending and investing decisions?
Financial Institutions (FIs) and investors can introduce, and have started to introduce, sustainability performance indicators (SPIs) such as Energy Efficiency Operating Index (EEOI)/Annual Efficiency Ratio (AER) into their investing and lending decisions. These metrics enable comparability and benchmarking across shipowners’ disclosures on the carbon intensity of their ships. There are also increasing regulatory expectations on FIs to disclose climate-related information on their portfolios, and this will translate into pressure on borrowers to satisfy these requirements.
