Surviving Future Storms With More Data

This is a crazy summer—floodings in China, typhoons in Asia, wildfires in the U.S., and heat waves in Europe. These incidents are causing catastrophic impacts to businesses and making investors and authorities take climate-related risks seriously.

With damaging facilities and disrupted supply chains and operations, more businesses are asked to track and measure their climate-related risk. This is why global trading platforms require listed companies to provide financial implications from climate-related risk with increasingly specific and quantitative data.

HKEX and SGX are introducing additional mandatory requirements next year for listed companies to provide financial data that aligns with the International Sustainability Standards Board (ISSB) Climate Standard.

To prepare for such disclosure and meet compliance requirements, organizations need to start building a comprehensive data strategy, robust data architecture, and organization-wide education on climate-related risk, according to data and ESG experts.

Knowing the unknown

A comprehensive data strategy for climate-related disclosure begins with understanding and assessment, said Kiki Wang, ESG lead for Greater China at management consulting firm Sia Partners.

Climate-related data can be a foreign territory for many in the compliance and data team. The assessment process helps to familiarize climate literacy and build competency in the area. More importantly, it allows businesses to identify gaps in climate-related disclosure requirements, providing a clear starting point.

For example, HKEX’s proposed mandatory interim disclosure that will become effective in January 2024 allows qualitative disclosure on future climate-related risks but quantitative disclosure on current effects.

HKEX’s consultation paper stated that a construction company may have to disclose how increased heat waves may affect outdoor worker's safety, delay construction works, and reduce its current earnings. Over time, quantitative disclosure will be required on current and anticipated climate-related risks, like the percentage of assets or business activities vulnerable to climate risks.

A gap analysis to map out potential data sources is essential to prepare for these upcoming stringent requirements.

“Strategies for effective data collection need to be established, ensuring that the quality, gaps, completeness, and accuracy of the data are appropriately taken into account,” said John Liu, head of digital service at energy technologies provider Schneider Electric Hong Kong.

Quality internal data

The challenge of data accuracy comes in two folds—sourcing the relevant external climate data and collecting quality internal operations and financial data, noted Liu.

“Accurate, comprehensive, and timely data forms the backbone of effective compliance,” he said. “Enterprises often grapple with data collection, management, and interpretation, as these processes require consistent and high-quality data across all business operations.”

More businesses are turning towards IoT devices and smart meters to measure their operational data. Aiming to help companies collect and analyze internal operational data, Liu said Schneider Electric provides IoT-enabled, plug-and-play energy management devices and management platforms. Riding on this platform and the firm's consulting service, it aims to support businesses in developing a data strategy that collects operational data with quantifiable carbon emission and sustainability information.

Sourcing relevant climate data

On top of internal data, the external climate-related data is equally important but more challenging to collect and process.

Wang from Sia Partners noted there are many different climate data providers, including Bloomberg and S&P providing different levels and coverage of climate and carbon data. Insurance company AXA Climate is also entering the game by riding on its internal risk assessment model to offer climate-related data.

“Our models are built and derived from data we collected for different climate events over decades and provide comprehensive analysis based on the losses suffered by clients,” said Chelsea Jiang, chief technical and innovation officer, AXA Greater China. "In addition, we have more than 30+ climate scientists studying the trends of climate change, which enable us to incorporate these scientific findings into our models.”

Jiang quoted the example of Typhoon Mangkhut in 2018, which brought massive property damage in Hong Kong, resulting in HKD2.5 billion in property insurance claims. Through analyzing related typhoon trends and financial data, Jiang said AXA Climate aims to help businesses understand the likelihood and severity of climate-related risks to businesses, then convert it into financial impact.

Processing the Scope 3 conundrum

One major challenge for processing climate-related risk disclosure is the increasing emphasis on Scope 3 greenhouse gas (GHG) emission data—indirect emissions in the value chain. It includes the extraction and production of purchased materials and transport-related activities in vehicles not owned or controlled by the business.

“Given Scope 3 relies heavily on self-disclosure from suppliers or business partners, there must be effective engagement efforts to acquire carbon emission or energy consumption data when data is not publicly disclosed,” said Wang.

With 15 different GHG protocol categories, Liu added that processing Scope 3 data can be complicated. On top of establishing a relationship with data providers, he suggested businesses build data integration with these providers for automatic refresh to ensure data is updated.

"Investing in sophisticated data management systems and tools is essential to gather, analyze, and report necessary data consistently and efficiently," he said. Training is another critical element, allowing staff to correctly understand and interpret data requirements.

Companies can use the data to assess their climate-related risks and opportunities once the data has been collected and verified. Wang said businesses should also invest in data quality tools and processes to achieve this.

“Given how varied and scattered the required data inputs are, a lot of manual work and iterations may be required before obtaining reasonably accurate results,” added Wang. “The role of consultants is to assist their large corporate clients in this exercise.”

“To accommodate the growing volume and diversity of data, a scalable and flexible data storage solution should be employed, such as data lakes or data warehouses,” added a spokesperson at AWS.

The cloud provider also supports different data management tools, helping businesses manage various types of data and enabling the availability and integrity of the data. AWS also suggested companies leverage advanced analytics tools and AI/ML technologies to perform in-depth data analysis.

Track, measure, and improve

To effectively mitigate their climate-related risks, businesses should also develop comprehensive dashboards with detailed goals and plans for improvement.

“This can provide a holistic view of the enterprise's climate-related performance and contribute to transparent, accurate reporting,” added AWS.

One such example is Singapore-headquartered data center operator Digital Edge. Despite being a private company, the company issues an annual ESG report aiming to track its ESG metric for operating energy-efficient data centers. Some of its aggressive ESG targets include sourcing 50% of its power from renewable sources by 2025 and designing new data centers to achieve a target annualized power usage efficiency (PUE) of 1.25 or better.

With such precise measurement, Digital Edge’s chief development & construction officer, Jay Park, said the company made a dedicated effort to adopt innovative sustainable technologies. Park said it applies lithium-ion capacitors for energy storage and promotes the application of StatePoint Liquid Cooling technologies in servers to reduce heat in data center operations.

“We aspire for our newly built data centers to have the lowest PUE in our industry,” stated the company’s ESG report. “The investments we are making will ensure we can live our values—and meet our customers’ needs—for decades to come.”

Beyond technologies and compliance

Nevertheless, technology itself is not enough for a comprehensive climate-related risk strategy. With experiences helping regional businesses develop their sustainable strategies, Liu from Schneider Electric said leadership and stakeholder management are often the core for turning these long-term goals into reality.

He said business leaders must demonstrate strong commitment with necessary resources and support. They can consider establishing a dedicated compliance team to oversee the process and manage data collection and communications with stakeholders, both internal and external.

“Ultimately, while a strong data architecture is crucial, the human element in stakeholder management and organizational readiness is equally vital for successful compliance,” said Liu.

Despite all the challenges in building a climate-related risk data strategy, experts said the effort is worth it with benefits beyond compliance. Liu said collecting and analyzing internal data involves reviewing operational processes, which often uncover opportunities for improvement in efficiency and productivity.

The financial benefit is also increasingly noticeable. Wang said enterprises managing their carbon emission are better positioned to gain from carbon trading. HKEX last year launched Core Climate, a new marketplace that allows corporates and investors to source, purchase, settle, and retire voluntary carbon credits.

She added that more investors and consumers know businesses' ESG risk and transparency. “More investors are assessing ESG risks of enterprises before investing, and potential clients are often evaluating this dimension when selecting suppliers,” she said.

“While developing a more accurate, data-centric climate-related risk analysis may initially be driven by compliance needs, it can lead to a variety of benefits that enhance a company's resilience, competitiveness, and profitability,” Liu concluded.

Sheila Lam is the contributing editor of CDOTrends. Covering IT for 20 years as a journalist, she has witnessed the emergence, hype, and maturity of different technologies but is always excited about what's next. You can reach her at [email protected].

Image credit: iStockphoto/TebNad