#ClimateMetrics

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Best Practices in Climate Reporting: Accounting for Long Short Portfolios and Derivatives

Climate change is one of the most pressing issues of our time, and accurate reporting is crucial for raising awareness and driving action. A recent article on Inrate.com delves into the best practices for climate reporting, specifically focusing on how to account for long, short portfolios, and derivatives.

𝐊𝐞𝐲 𝐓𝐚𝐤𝐞𝐚𝐰𝐚𝐲𝐬:

𝐊𝐧𝐨𝐰 𝐘𝐨𝐮𝐫 𝐀𝐮𝐝𝐢𝐞𝐧𝐜𝐞: Tailor your reporting to resonate with your audience’s level of understanding and interest in climate issues.

𝐌𝐚𝐤𝐞 𝐭𝐡𝐞 𝐂𝐥𝐢𝐦𝐚𝐭𝐞 𝐂𝐨𝐧𝐧𝐞𝐜𝐭𝐢𝐨𝐧: Highlight the link between climate change and its causes, such as burning fossil fuels.

𝐇𝐮𝐦𝐚𝐧𝐢𝐳𝐞 𝐚𝐧𝐝 𝐋𝐨𝐜𝐚𝐥𝐢𝐳𝐞: Share personal stories and local impacts to make the issue more relatable.

𝐂𝐞𝐧𝐭𝐞𝐫 𝐂𝐥𝐢𝐦𝐚𝐭𝐞 𝐉𝐮𝐬𝐭𝐢𝐜𝐞: Focus on how marginalized communities are disproportionately affected by climate change.

𝐈𝐧𝐜𝐥𝐮𝐝𝐞 𝐒𝐨𝐥𝐮𝐭𝐢𝐨𝐧𝐬: Offer actionable solutions and innovations to combat climate change.

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Role of Climate Data in Assessing Portfolio Risk

Climate-related factors are increasingly being incorporated into financial analysis, with a growing consensus among financial institutions on the importance of understanding the risks and opportunities emanating from climate change. In financial analysis, climate data focuses on metrics that primarily impact asset value, operational costs, and investment returns. These metrics may be qualitative or quantitative, such as greenhouse gas (GHG) emissions and targets, extreme weather events tracking, climate scenario analysis, and climate-based regulatory changes and market trends.

Collecting, reporting, and analyzing such climate data is essential for portfolio assessment for the following reasons:

1. Rising Physical Impacts: The number and severity of extreme weather events, such as wildfires, hurricanes, and droughts, have increased over time, especially in the last few years. While financial institutions have limited exposure to physical impacts through their physical assets, they need to consider the indirect effect on their financial assets depending on their exposure and vulnerability to climate hazards.

2. Regulatory Changes: With the rise of policies and regulatory frameworks, such as the Corporate Sustainability Reporting Directive (CSRD) and Task Force on Climate-Related Financial Disclosures (TCFD), which mandate reporting on the effects of climate change on a company’s operations and vice versa, the need for a strategy to collect and analyze climate data has become more prominent.

3. Investor Demands: There has been a growing demand from investors for more visibility into climate-related variables in their portfolios. While the reasons for investor interest in climate data may range from risk adjustment to sustainability tilts, overall, this trend has resulted in a higher demand for climate data-based analysis, especially from shareholders, debtors, and other stakeholders.

4. Reputational Risk: Public concern about climate change has grown profoundly, and customers and stakeholders are increasingly urging institutions to participate in the transition toward a low-carbon economy. Hence, it is important to incorporate climate data into due diligence practices to avoid any climate-related controversies attracting negative media attention.

These elements have brought climate impact data solutions to the forefront of financial and corporate strategy. As climate risks escalate, the relevance of accounting for climate-related factors in environmental, social, and governance (ESG) portfolio analysis for investors, asset managers, portfolio managers, and financial institutions has grown, along with the need for more comprehensive data reporting.

Recent developments in climate change data reporting standards and frameworks, such as the International Sustainability Standards Board (ISSB), Global Reporting Initiative (GRI), CDP, Sustainability Accounting Standards Board (SASB), European Sustainability Reporting Standards (ESRS), etc., have enabled companies to report on their climate change data more effectively. This makes it easier for portfolio managers to incorporate climate data solutions into risk assessment and harmonize portfolios with long-term sustainability goals. This analysis is integral for investors and portfolio managers, as it helps them reduce their exposure to climate risks and identify avenues for opportunities by offering insights into how environmental factors affect future earnings and asset value.

Read More: Role of Climate Data in Assessing Portfolio Risk