Climate Risk Management in Your Business
Climate risk poses significant impact for business operations, potentially affecting the bottom line in profound ways. In fact the estimated cost cost of climate change damage is estimated to be between $1.7 trillion and $3.1 trillion per year by 2050 (World Economic Forum 2023). The increasing frequency of extreme weather events, rising sea levels, heat waves and shifting climate patterns pose significant risks to businesses - from supply chain disruptions, to the cost of damaged assets, shifting market demands, and preparation for new regulatory compliance requirements. Understanding a companies unique risks and their potential financial implications is a critical aspect of preparing for a climate future that is unpredictable - whether you are a large corporation or a small business.
What Exactly Are Climate Risks?
Lets start with some definitions. Climate risks can be broadly categorized into two types: physical risks and transitional risks. Physical risks are those directly resulting from climate change, such as damage to assets from extreme weather events or operational disruptions due to water scarcity. Transitional risks, on the other hand, arise from the shift towards a low-carbon economy, including policy changes, technological advancements, and shifts in market preferences and investor sentiments.
Infographic - Recommendations on the Task Force for Climate-Related Financial Disclosures
Extreme weather events such as hurricanes, floods, and droughts can lead to direct operational disruptions, including damage to facilities and infrastructure. For example, in 2017, Hurricane Harvey caused widespread damage to businesses in Texas, with estimated costs running into billions of dollars. Additionally, these events can disrupt global supply chains, leading to shortages of materials, increased costs, and delays. A business reliant on raw materials from a region prone to climate-induced disruptions may face increased production costs and decreased availability of goods, negatively impacting profitability.
Climate risk assessments have surged from a specialized concern to an essential component of strategic business planning. The onset of extreme weather impose unpredictable and substantial risks to businesses all around the world, urging a rethink of operations, supply chains, and market strategies.
Strategizing Against Climate Risks
And this may seem very overwhelming for anyone that has not considered this in their business before. But it doesnt need to be complex. There are straightforward steps you can start with to start mapping out climate risks that are most important to your business and unique situation.
1. Identify and Assess Risks: Start by conducting an assessment of how climate change could impact your business operations and activities. Look beyond the direct threats to your day-to-day operations and consider broader implications, such as supply chain disruptions or regulatory changes. This initial deep dive will help you understand the scope of potential challenges and lay the groundwork for effective risk management.
2. Prioritize Your Risks: Not all risks carry the same weight. Once you've mapped out the potential threats, it’s time to prioritize them based on their likelihood and potential impact on your business. This step is crucial for resource allocation, ensuring you focus your time and finances on mitigating the most significant threats first. It’s about being smart with your defenses, targeting areas where you can make the most difference.
3. Develop and Implement Strategic Actions: With a clear understanding of what risks to tackle first, you can now plan and execute specific strategies. This might involve adapting your infrastructure to withstand extreme weather events, optimizing processes to reduce your environmental footprint, or investing in sustainable technologies and practices. The goal here is not just to shield your business from risks but to embed it as a strategic tactic in your operations.
The Way Forward
Adopting a proactive approach to climate risk can be a tool to build resiliency and future proofing a company. Starting off with a simple business assessment of potential climate and transitional risks that can affect a business, its operations and even its industry, can set a business up in the right direction. As businesses navigate the complexities of a climate-impacted world, integrating climate risk assessment into the core of strategic planning emerges as a critical pathway to being proactive. This integration not only fortifies businesses against the uncertainties of climate change but also builds foundations for resilience in your business.
