RISK MANAGEMENT
TCFD 201-2
Moscow Exchange Group admits that climate change poses risks to business continuity that may have long-term economic, environmental, and social implications for many sectors of the global economy, society, and the companies of the Group.
As part of its risk management system, the Group regularly identifies and assesses business risks in terms of their likelihood and expected financial losses. Moscow Exchange continuously monitors the legal environment and introduces international best practices to identify and assess climate risks and incorporate climate-related disclosures in its reporting.
Under the business continuity management system, a list of climate risks is compiled and factored in to strategic and financial planning. Moscow Exchange regularly assesses the impact of climate risks on trade and investment portfolios.
- compilation of a list of risks and opportunities, categorized and prioritized;
- assessment of the likelihood and impact of the risks identified;
- scenario analysis of risks and opportunities;
- updating the heat map of risks;
- monitoring the implementation of risk mitigation measures.
In line with the TCFD’s recommendations, Moscow Exchange distinguishes two main types of climate risks:
- physical risks: risks of extreme weather events, natural and man-made disasters;
- transition risks: risks associated with the transition to a lower-carbon economy.
Physical risks involve potentially significant damage to premises and infrastructure, and harm to employees of the Group, its customers and partners, disrupting their businesses and resulting in financial losses that may prove critical.
Transition risks are divided into policy and legal, technology, market, and reputation risks. Each type may have significant financial implications for the Group’s business.
Moscow Exchange has divided its climate risks into five types: market, policy and legal, reputational, physical, and technology, and estimates their probability and the expected losses (see the table below for a more detailed description).
Climate risks | Impact | Probability of small-magnitude risk | Probability of large-magnitude risk | Response to risk or risk mitigation measures |
|---|---|---|---|---|
Physical risks | ||||
Acute risks | ||||
Floods, snowfalls | Changes in precipitation and extreme variability in weather patterns, including floods with destruction of roads, bridges, power lines, buildings, and other infrastructure, resulting in loss of life or injuries and leading to business shutdown | Low | Low | Disaster recovery strategies include:
|
Freezing rain | Power failures (ice-covered power lines become extremely heavy, causing line supports, insulators, and lines to break). Traffic delays due to icy roads. Potential loss of life or injuries | Moderate | Low | |
Hurricanes, storms | Destruction of power lines, residential buildings, and other infrastructure, with loss of life or injuries and leading to business shutdown. Traffic delays | High | Low | |
Forest fires | Destruction of property. Release of hazardous chemicals due to wildfires has a significant adverse impact on human health | High | Low | Employee relocation plan will be rolled out in the event of forest fire emergencies |
Chronic risks | ||||
Extremely hot weather | Adverse impact on employee health and operability of equipment. Lower productivity | Moderate | Low | Providing a comfortable workplace environment: workplaces in air-conditioned offices will be offered to employees working from home without air-conditioning |
Extremely cold weather | Adverse impact on employee health and operability of equipment, resulting in slowdown or shutdown of operations | Low | Low | Providing a comfortable workplace environment: employees working in the office will be permitted to stay at home. Employee relocation plan will be rolled out if extremely cold weather is followed by a central heating shutdown |
Transition risks | ||||
Policy and legal risks | ||||
High power costs | Energy prices rising faster than inflation as a result of abrupt transition to zero-carbon power generation | Moderate | Moderate | Wider use of energy-efficient equipment |
Enhanced emissions-reporting obligations | Additional financial and labor costs to collect information and report greenhouse gas emissions and their reduction | Moderate | High | Establishing carbon reporting procedures, participating in national and international carbon reporting initiatives. Engaging consultants for carbon reporting |
Inaccurate emissions disclosures | Fines and reputational damage: this is a developing area with new rules and disclosure standards, such as the TCFD’s Recommendations or the EU SFDR, including at the national level (Russia supports the implementation of new climate-related reporting rules along with requirements introduced this year) | Low | Low | |
Introduction of fines for non-compliance with requirements on greenhouse gas emissions | Increased operating costs (higher compliance costs, increased insurance premiums) | Low | Low | |
Higher exposure to litigation | Increased legal costs and expenses, including from court-imposed fines | Low | Low | |
New requirements for greenhouse gas emissions disclosures hindering placement of securities | Additional costs for maintaining a dedicated database of greenhouse gas emissions and preparing reports. Additional equity placement requirements | Low | Low | Establishing carbon reporting procedures, participating in national and international carbon-reporting initiatives. Engaging consultants for carbon reporting |
Lack of clear regulatory targets for carbon emissions | Multiple possible interpretations of laws and regulations. Increased risk of non-compliance | Low | Low | |
Technology risks | ||||
Costs of transition to lower-emissions technology | Failed investments in new technologies. Costs of setting up new business processes. Increased costs for transitioning to lower-emissions technology | Low | Low | Options for hedging financial risks associated with depreciation of assets |
Power outages and emergencies due to low system resilience | Temporary power outages due to insufficient power storage capacity and lack of upgraded power grid services (resulting from a rapid and widespread transition to renewable energy sources). Power outages are expected to become more common at some point during the transition to lower-carbon technologies | Low | Low | Recovery strategies for a prolonged power outage at a single location include:
|
Failed investments in new lower-carbon technologies | Reduced demand for products and services | Low | Low | Options for hedging financial risks related to investment in high-risk lower-carbon technologies |
Market risks | ||||
Change in investor behavior (increased demand for ESG products and sustainable investment) | Shifts in consumer preferences. Reduced demand for services not meeting climate goals due to changes in investor behavior | Low | Low | Introduction of ESG requirements for issuers and control over their implementation |
Lower energy prices as a result of energy transition | Reduced revenue of issuers due to lower demand for fossil fuels | Low | Low | Options for hedging financial risks associated with depreciation of assets |
Reduced demand for raw materials | Higher bankruptcy rate among issuers | Low | Low | |
Increased tax expenses of issuers | Changes in the terms of carbon taxation, including increased tax rates, may lead to increased tax costs for issuers | Low | Low | |
Increased power and heating prices due to transition to zero-carbon energy sources | Increased office maintenance costs | Low | Low | Switching employees to remote working in winter |
New regulations limiting greenhouse gas emissions | Increased costs due to the implementation of emissions purification technologies. Decreased production due to the introduction of emissions targets | Low | Low | Establishing carbon reporting procedures, participating in national and international carbon reporting initiatives. Engaging consultants for carbon reporting |
Share of green energy in the total power costs of companies is not regulated | Lack of a clear vision on the share of green energy may hinder the growth of the carbon market | Low | Low | Partnership development with issuers |
Reputational risks | ||||
Increased concerns or negative feedback of stakeholders regarding Moscow Exchange’s ESG policy | Lower demand for services and negative impact on workforce management and planning (hiring and retention), resulting in revenue decrease | Low | Low | Establishing carbon reporting procedures. Participating in national and international initiatives, including carbon reporting initiatives. Engaging consultants for carbon reporting |
Reduced revenue from decreased demand for services | Increased stakeholder concerns over issuers’ compliance with emissions standards or negative stakeholder feedback. Reduced investor interest due to uncertain market signals | Low | Low | |
Lower investor interest | Reduction in capital availability for issuers | Low | Low | Options for hedging financial risks associated with depreciation of assets |
Energy source | Resource efficiency | Products and services | Markets | Resilience |
|---|---|---|---|---|
Reduction in power and heat consumption Transition to environmentally friendly or lower-carbon energy sources New technologies Remote or hybrid work formats Contributing to the development of a regulated carbon market in Russia | Use of more efficient modes of transport Hybrid and remote work formats (work-from-home policy) Recycling Reduced water consumption | Development of new products (green bonds, ETFs) Launch of new services (climate indices, training for financial market participants) New technologies Development and/or support of low-emission goods and services Emergence and evolvement of new industries related to alternative energy sources | Development of a sustainable supply chain policy and a new environmental policy Public sector incentives to increase market participation (tax exemptions or regulatory incentives) Partnerships with other markets Attracting international investment by meeting global disclosure standards Launch of green certificates of the carbon market (NCE) Government incentives (tax exemptions) Attracting investment by meeting global environmental protection requirements | Market participant training and education Participation in renewable energy programs and adoption of energy efficiency measures Public recognition of contribution to environmental protection |