Navigating The New Reality Of Climate Risk
In 2008, the financial crisis sent shockwaves through global markets, with companies scrambling to shore up their balance sheets and rethink how they managed risk. The lessons learned from that period reshaped how corporate treasurers view economic vulnerabilities. Fast forward to 2024, and a different kind of risk is knocking at the door. This time, it’s climate change.
The latest reports from the Climate Financial Risk Forum (CFRF) are clear: climate risks are no longer distant concerns. Corporate treasurers now need to treat short-term climate impacts—like extreme weather and supply chain disruptions—as immediate financial threats.
For treasury teams, this means embedding short-term climate risk assessments into the core of daily financial operations. Just as treasury functions had to evolve after the financial crash, they must now adapt to this new reality. Failure to integrate these risks into liquidity management, capital allocation, and operational planning could leave companies exposed, not only to financial losses but to reputational damage as well.
The Short-Term Scenarios Analysis report from the Climate Financial Risk Forum (CFRF) leaves no room for complacency. It stresses that corporate treasury teams must treat short-term climate risks—extreme weather, commodity price fluctuations, and supply chain disruptions—as pressing concerns. These events are no longer seen as long-term, distant threats and are becoming realities that can affect day-to-day financial operations within the next few years.
Treasurers will need to update their risk models to account for these short-term impacts. This includes reviewing capital reserves, liquidity buffers, and exposure to assets vulnerable to climate-related events. For instance, businesses reliant on global supply chains may find their inventories or production lines disrupted by sudden flooding or heatwaves. This level of unpredictability demands real-time risk assessments to ensure companies can maintain operational continuity.
Treasurers will need to scrutinize their capital reserves, liquidity buffers, and overall exposure to assets vulnerable to climate-related events. For example, stress-testing liquidity positions in the context of severe weather or supply chain interruptions could reveal shortfalls that were previously unaccounted for. Banks are increasingly factoring these risks into capital adequacy assessments, which could lead to changes in treasury teams’ risk appetite frameworks.
Furthermore, firms must adjust their credit risk models to account for heightened risk due to climate shocks. Rising volatility from future climate impacts may interact with existing financial cycles, exacerbating credit risks and potentially triggering more severe liquidity shocks. As a result, treasurers should engage in scenario testing that captures these compound effects on short-term liquidity and capital needs.
The CFRF highlights a key takeaway: treasurers should collaborate closely with their banking partners to leverage climate scenario tools and stress-testing models that assess how short-term risks impact liquidity and financial stability. This is not just about long-term transition plans but immediate actions that ensure resilience over the next five years. Treasury teams that fail to act quickly may face increased financial volatility and operational disruptions.
In addition to integrating short-term climate risks into daily operations, treasury teams are being urged to explore new financial products that support climate resilience. The Mobilising Adaptation Finance report emphasizes that treasurers will need to shift focus from traditional financial instruments to those designed to mitigate the impacts of climate change. Products such as sustainability-linked loans, green bonds, and insurance-linked securities are no longer niche offerings but central to future financial planning.
The report outlines that businesses operating in vulnerable sectors, such as agriculture, real estate, and energy, must seek out financing solutions that help them adapt to increasingly volatile conditions. For treasury teams, this means rethinking capital allocation and considering investments that support long-term resilience, like infrastructure upgrades or diversification of supply chains to mitigate the risk of extreme weather disruptions.
Furthermore, the development of these products will require close collaboration with banks. The CFRF encourages treasurers and their banking partners to work together on creating tailored solutions that meet specific climate adaptation needs. Banks, with their ability to structure complex financing arrangements, can help treasurers access innovative products that safeguard operational resilience. This shift will also allow companies to meet investor expectations around sustainability, reducing the risk of reputational damage linked to climate inaction.
While climate risks have been on the radar for some time, the Nature-Related Risk Handbook introduces a new layer of complexity for corporate treasury teams: the impact of nature loss on financial stability. As biodiversity declines and ecosystems degrade, businesses that rely heavily on natural resources, such as water and agriculture, face increased risks of operational disruptions and cost volatility.
The CFRF report outlines how treasury teams must incorporate nature-related risks into their financial models, much like they do with climate risks. For example, companies in the food and agriculture sector may need to assess their exposure to water scarcity or biodiversity loss, which could disrupt supply chains or raise input costs. This shift requires treasury teams to move beyond traditional risk assessments and consider how ecosystem degradation could impact both short-term liquidity and long-term profitability.
Treasurers should begin working with their banking partners to access data and tools that can model these nature-related risks. While frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD) are still in development, proactive treasury teams can get ahead by integrating early nature risk assessments into their financial strategies. This collaboration will be key to creating financial products that address not just climate resilience but the broader environmental risks that companies are increasingly exposed to.
With regulatory pressure mounting, corporate treasurers will need to adapt quickly to new climate and nature-related reporting requirements. The Mobilising Adaptation Finance and Nature-Related Risk reports both emphasize the increasing importance of transparency in how companies manage these risks. Financial institutions are expected to align with frameworks like the Taskforce on Climate-related Financial Disclosures (TCFD) and the upcoming Taskforce on Nature-related Financial Disclosures (TNFD), which demand greater clarity on how businesses are preparing for climate and environmental risks.
For treasurers, this means not only reporting on traditional financial metrics but also disclosing how their liquidity and capital planning address climate adaptation and nature-related risks. Working closely with banks to improve data collection and risk modeling will be critical to meeting these new regulatory standards. Failure to comply could result in increased scrutiny from investors, regulators, and stakeholders, as well as potential financial penalties.
Banks, in particular, are in a strong position to support treasurers by offering expertise on scenario analysis, regulatory compliance, and sustainable finance solutions. As disclosure requirements tighten, proactive collaboration between treasurers and their banking partners will be essential in navigating this new regulatory landscape.
The CFRF reports underscore the critical need for stronger collaboration between corporate treasury teams and their banking partners. As both climate and nature-related risks become immediate financial concerns, banks are increasingly essential in helping treasurers navigate these challenges. From providing advanced climate risk assessment tools to creating tailored financial products, banks have the expertise and resources to support treasurers in building resilience.
Treasurers should actively engage with their banking partners to integrate climate and nature risks into financial strategies. Whether it’s through joint development of green financing instruments or leveraging scenario analysis to stress-test business models, this partnership is key to maintaining operational stability in a rapidly changing environment. Together, they can unlock new opportunities in sustainable finance while ensuring compliance with emerging regulations and managing the risks that come with a warming planet.
The Climate Financial Risk Forum’s 2024 reports make one thing clear: corporate treasury teams can no longer afford to view climate and nature-related risks as distant concerns. These risks are now integral to financial operations and require immediate attention. From integrating short-term climate risk assessments into daily decision-making to adapting financial products for resilience, treasurers must evolve their strategies to navigate this new era of risk management.
As treasurers and their banking partners work together to address these challenges, those who act swiftly will be better positioned to protect their balance sheets and seize new opportunities in sustainable finance. For those slow to adapt, the financial consequences could be significant—both in terms of operational disruption and missed opportunities for growth in a low-carbon, climate-resilient future.
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