Beyond CSR: Why CFO Need to Understand Climate Risk

Climate change is becoming increasingly relevant to the business world as its impacts can affect a company’s financial condition and performance. Extreme weather, resource scarcity, regulatory changes, and technological developments can disrupt operations and affect a company’s costs, assets, revenue, and cash flows.

Because these impacts can be financially material, climate risks are no longer just a concern for sustainability or CSR functions. Finance functions also need to understand how climate risks and opportunities can affect business decisions and the company’s financial condition.

Climate Risks Are No Longer Just a CSR Issue

Climate risks can affect a company’s financial condition through an outside-in perspective, where external climate-related factors financially affect the company. These impacts may include supply chain disruptions, higher production costs, impairment of assets, and changes in cash flow and access to funding.

In Indonesia, this urgency is growing with the issuance of PSPK 1 (General Requirements for Disclosure of Sustainability-related Financial Information) and PSPK 2 (Climate-related Disclosures). Both standards take effect for financial years beginning on or after January 1, 2027. PSPK 1 and PSPK 2 adopt IFRS S1 and IFRS S2, developed by the International Sustainability Standards Board (ISSB). These standards also integrate the Task Force on Climate-related Financial Disclosures (TCFD) framework into the sustainability disclosure standards.

With these standards in place, companies increasingly need to connect sustainability information with financial information. This makes the role of the CFO and finance team even more important. They need to understand how climate risks and opportunities can affect financial planning and shape business decisions.

Why Climate Risk Matter to CFO

The CFO’s role in facing climate risk is no longer limited to preparing and presenting financial information. CFO also need to understand how climate risk and opportunities can affect business decisions and financial planning. This requires CFO to coordinate with various functions, including sustainability, risk management, and operations. Information from these functions can serve as a basis for budgeting, investment planning, funding strategies, and risk management.

For example, when a company needs to replace machinery due to changes in environmental regulations, the CFO needs to assess the investment required, the funding sources, and the impact on the company’s financial plan. This allows climate-related considerations to become part of the broader business decision-making process.

The need to integrate this information is becoming increasingly relevant with the implementation of PSPK 1 and PSPK 2. CFOs need to ensure that companies have adequate processes and information to support sustainability and climate-related disclosures. Climate risk can also have implications for various financial statement items and estimates. Therefore, CFOs need to ensure that identified risk can be translated into relevant financial information.

So, how can climate risks affect assets, inventory, liabilities, cash flows, and other financial statement items? Read more in the article How Do Climate Risks Affect Financial Statements?

Four Pillars of Climate-Related Disclosures

In accordance with TCFD (2017) and IFRS S1/S2 (2023), PSPK disclosures must be prepared based on four key pillars:

1. Governance: Explains how the Board of Directors and Board of Commissioners oversee climate-related risks and opportunities. This includes the allocation of responsibilities, discussions of climate-related issues in meetings, and their connection to management incentives or remuneration.

2. Strategy: Assesses how climate risks and opportunities may affect the company’s business model, value chain, as well as investment and capital allocation decisions. Companies also need to consider the resilience of their strategies through climate scenario analysis.

3. Risk Management: Describes the company’s processes for identifying, assessing, prioritizing, and monitoring climate risks. These risks then needs to be integrated into the company’s Enterprise Risk Management (ERM) framework.

4. Metrics and Targets: Measures the company’s performance in addressing climate risks and opportunities through relevant indicators. Measurements may include Scope 1, Scope 2, and Scope 3 emissions, as well as measurable emissions reduction targets.

Also Read: Addressing Scope 3 under PSPK 2: Challenges and Strategies for the Manufacturing Sector

Ultimately, these four pillars need to be connected with financial reporting. Identified climate risks may affect assumptions, estimates, asset values, costs, revenue, and projected cash flows.

Therefore, CFOs need to ensure that information from sustainability, risk management, and operations functions flows into financial planning, measurement, and reporting processes. This ensures that climate disclosure becomes not only sustainability information, but also help demonstrate how climate risks and opportunities may affect a company’s financial position, performance, and cash flows.

Roadmap for PSPK Implementation in 2027

As the implementation of PSPK 1 and PSPK 2 approaches in 2027, companies need to start preparing the processes and infrastructure required to support sustainability and climate-related disclosures. Several steps that can be taken include:

• Mapping climate risks and opportunities to identify issues that could have a material impact on the company.
• Data infrastructure and quality to ensure that climate-related information can be properly collected, processed, and traced.
• Internal controls and audit trails to improve the reliability and traceability of information used in disclosures.
• Cross-functional collaboration between finance, sustainability, risk management, operations, and other relevant functions.
• Utilizing transition relief in accordance with applicable requirements to help companies prepare for disclosures progressively.

These preparations should not be the sole responsibility of sustainability teams. CFOs and finance teams play an important role in ensuring the readiness of data, processes, and controls that support the connectivity between sustainability information and financial information. By preparing early, companies can build a more integrated reporting process and strengthen their readiness for PSPK 1 and PSPK 2. The right support can also help companies align their processes, data, and disclosures with the standards’ requirements. PT Synergy Ultima Nobilus is ready to support companies through consulting services tailored to their needs.

Contact Us to learn more.

Reference

Task Force on Climate-related Financial Disclosures. (2017). Recommendations of the Task Force on Climate-related Financial Disclosures

International Sustainability Standards Board. (2023). IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information. International Financial Reporting Standards (IFRS) Foundation.

International Sustainability Standards Board. (2023). IFRS S2: Industry-based Guidance on implementing Climate-related Disclosures. International Financial Reporting Standards (IFRS) Foundation.