Mandatory climate reporting requirements have boosted companies’ awareness of climate risks, but their prediction models can be problematic, according to a climate risk accounting expert.

Organisations are not prepared to accurately calculate their exposure to physical climate risks, according to UNSW climate risk accounting expert Dr Tanya Fiedler.

As businesses rapidly adapt to changing climate disclosure requirements in a world of increasing risk, Fiedler observed that emerging climate risk models are largely not verified by academic research.

“In effect, we’re trying to build an entirely new system of accounting in a period of a decade, whereas financial and cost accounting have developed over centuries,” Fiedler said.

“So, what you have is this massive investment in climate intelligence by global service providers.

“To my knowledge, however, none of the models, algorithms, or methods they use have been peer-reviewed by scientists, and academic research is increasingly showing the outputs of such work to be problematic,” she said.

Fiedler delineated two key types of climate-related risks. One is the risk of transitioning to low-carbon technologies, largely borne by carbon-emitting companies whose business models are no longer viable in a zero-carbon economy.

The other is the physical risks of climate change, which Fiedler believed businesses were unprepared to properly assess. Businesses would likely struggle to incorporate complex, globally-focused climate data into their risk assessments, she said.

“Unlike transition risk, when analysing physical risk organisations rely on models and information sources developed in the climate sciences. These, in contrast to the economic models underpinning assessments of transition risk, are deeply unfamiliar to business,” Fiedler said.

Fiedler said businesses should take a more holistic approach to their climate risk assessments, incorporating qualitative and quantitative data in an approach she describes as “storylines.”

“Uncertainties associated with the risks arising from some types of climate extremes in particular can’t be presented confidently in quantitative form,” Fiedler said.

“So instead, a narrative is called for that allows decision making to proceed with an understanding of the full range of that uncertainty. This is important, as without appreciating the full range of potential outcomes, decisions can be made that might prove really damaging over the long term.”

According to Fiedler, a narrative-based approach would allow businesses to emphasise plausibility over probability and consider potential climate risks without requiring specialist analysis.

“The storyline approach makes use of quantitative information wherever possible, but the output is narrative that integrates both qualitative and quantitative information,” Fiedler said.

“It has the opportunity for a more integrated way of understanding organisational vulnerabilities and exposures.”