Eyes on the prize: the value of risk management

29 Oct 21

Government bodies need to get to grips with climate change risks to ensure that public money is effectively protected.

The impact of climate change is increasingly impossible to ignore.

Against a backdrop of more frequent extreme weather events, the World Economic Forum recently ranked climate action failure as the most concerning global risk.

In August, the United Nations’ Intergovernmental Panel on Climate Change issued its starkest warning yet. UN secretary general António Guterres called its report on climate change a “code red for humanity”.

A global challenge requires a global response. COP26 will shine a light on how governments across the world are tackling the emergency – and what more needs to be done together around the globe.

From the UK’s perspective, the government has committed to achieving net zero greenhouse gas emissions by 2050.

Although a small number of departments are central to leading the response, all government departments and arm’s-length bodies have a part to play.

To do that, every organisation across government needs to understand how climate change risks can have an impact on their organisation – and how they can actively start to manage these risks.

Financial and risk management across government

Most government organisations are managing significant risks and competing priorities: challenges arising from the recovery from Covid-19; post-EU exit requirements; and ensuring the ongoing delivery of public services, to name just a few.

Addressing long-term risks, such as climate change is also critical.

But why is considering net zero targets important from a financial and risk management perspective?

Put simply, without considering the risks associated with climate change now, government organisations may make strategic and operational decisions which cause problems down the line.

This is something that we at the National Audit Office (NAO) recently highlighted in our publication Climate change risk: A good practice guide for Audit and Risk Assurance Committees.

It is critical that public bodies gain an embedded understanding of the climate change risks facing them so that decision-makers are properly informed.

This is not only about managing risks; it is also about identifying climate-related opportunities – economic and otherwise.

For instance, in a report on climate change risk assessment, the Climate Change Committee, which advises the UK government on carbon emissions, highlighted opportunities that may emerge for trade.

It said that there could be a role for government in providing evidence and supporting businesses in transitioning to new functions as the climate changes.

‘Climate change risks are about more than just extreme weather events, such as the impact of flooding on infrastructure or interruptions to supply chains’

Through our new guidance, the NAO hopes to offer those working in public sector finance – specifically members of audit and risk assurance committees (ARACs) – a simple way to further their understanding and management of climate-related risk. This will help them properly fulfil their vital role in supporting and advising the board and accounting officers in their responsibilities of climate change risk management.

What are climate change risks?

Climate change risks are about more than just extreme weather events, such as the impact of flooding on infrastructure or interruptions to supply chains.

There are some less obvious risks that require serious consideration too.

For instance, there are a number of key risks relating to the transition to net zero, and these can be categorised as adaptation-related risks and mitigation-related risks.

In adapting to climate change, strategic uncertainty risk is exacerbated.

Organisations are making long-term spending decisions now. The uncertainty brought about by climate change makes future strategic planning highly challenging.

Organisations will need to be aware of the long-term social impact of climate change on communities – such as the risk of reduced workforce productivity due to rising temperatures.

Mitigation-related risks cover regulatory, legal or technological factors.

The government expects to achieve net zero by 2050. Achieving a lower-carbon economy will involve adhering to new legislative changes or investing in new technology.

The report also identifies some risks particular to government, such as policy leadership, value for money, accountability and coordination and delivery.

While these risks are not unique to government, they may be more prominent given the particular challenges faced by government organisations.

Starting the journey

Understandably, some government organisations are more advanced than others when it comes to identifying, assessing and managing climate change risks.

Organisations that do this well have a dedicated person or team accountable for climate change risk.

They can demonstrate that climate change is fully integrated into their risk assessments and that there is a clear strategy which involves consideration of climate change impacts.

The NAO’s good practice guide highlights a number of examples from organisations we have seen lead the way on reporting in this area.

It also sets out a clear way of thinking about climate change risk, using the principles of risk management set out in HM Treasury’s Orange Book.

It guides organisations through each stage of the risk management cycle – governance and leadership; risk identification and assessment; risk treatment and monitoring; risk reporting; and continual improvement.

The guide frames each principle in the context of climate change – setting out what organisations should be thinking about and trying to ensure that their consideration of climate change risk is effective.

Each stage of the process comes complete with a set of questions which ARACs can use to challenge management.

We also provide examples that illustrate where organisations have started to apply some of their thinking about climate change risk.

For many organisations, this is the start of the journey when it comes to climate change risk.

We really hope our guide allows these conversations to start – and continue – to take place.

Sharing good practice

In compiling our guide, we were struck by the extent to which climate change risk is evolving, and the speed at which the landscape is changing.

Over coming years, we expect to see further legislative changes and enhanced reporting requirements that the bodies we audit will need to comply with.

The NAO’s guide highlights some of the key initiatives, targets and policies to date.

‘Sharing good practice between organisations, being vocal in cross-departmental conversations, and learning from the lessons of others will be really important for government in coming decades’

Sharing good practice between organisations, being vocal in cross-departmental conversations, and learning from the lessons of others will be really important for government over the next few decades.

A theme throughout our guide is the importance of looking out beyond your own organisation for risks.

But the same applies to opportunities – we do not have to struggle alone with the climate challenge, and co-ordination and sharing is going to be key.

Achieving net zero and other environmental goals requires transformation on an arguably unprecedented scale.

This presents a number of strategic challenges that government must manage.

The National Audit Office is committed to providing accessible insight that supports robust assessment and reporting on environmental and climate risks.

Image credit | Paddy-Mills

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  • Chris Coyne

    is audit manager, financial and risk management, at the UK’s National Audit Office

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