Extreme weather events, mandatory reporting on climate related financial disclosures and the global transition to a low carbon economy are bringing climate risk to the front and center of organizations’ strategic priorities. Businesses are getting plans to reduce and report on emissions in place - but are they preparing for physical risk? What are they putting in place to mitigate against climate hazard events? Cervest's Climate Outlook asked 800 decision makers in the US and UK about their climate risk, and found that 88% had an asset impacted by extreme weather over the past five years but less than half had integrated physical risk plans into their financial risk management.
When climate events hit, they can cause physical damage and disrupt business continuity, with a significant impact on revenue. In 2021, flooding in China disrupted Nissan’s supply chain by forcing the closure of a plant capable of producing 600,000 cars a year. In the same year, drought in Germany reduced the Rhine’s water level to the extent that it disrupted European raw materials supply chains dependent on river shipping. Over the last 40 years, the change in the number of catastrophes caused by natural hazards has increased by 240%. The question for organizations is not if you’ll be affected by an extreme weather event, it’s when and how.
Why organizations should prepare for climate hazard events
Risk exposure to global assets from climate hazards is increasing, due to both intensifying climate volatility and socioeconomic activity. Essentially, where and how we build new infrastructure and assets is making the impact of climate hazards worse in many parts of the world. For example, as cities expand, they clear vegetation and replace it with hard impermeable surfaces, increasing urban area’s vulnerability to flooding and heat stress. Climate-related risks are set to increase across all sectors, affecting every single asset on the planet. It’s important that organizations have access to Climate Intelligence, to understand and manage both their impact on the environment, and the environment's impact on them.
Taking action on adaptation
The good news is that there are a range of things organizations can do now to get prepared for climate events. The Intergovernmental Panel on Climate Change (IPCC)’s Impacts, Adaptation and Vulnerability report earlier this year highlighted the importance of adaptation in managing the impacts of climate change. Here are four effective approaches decision-makers should consider.
1) Integrate adaptation and mitigation in your climate strategy
Climate policy and regulation means many organizations are implementing measures to track, measure and reduce their carbon emissions. Most organizations have resources and budgets for tackling carbon emissions in place. This includes activities such retrofitting buildings, changing operational processes and reducing emissions across their supply chain.
However, fewer organizations have allocated resources to managing physical risk. Adaptation means making adjustments to your organization that will support the ability to cope with and adapt to the impacts of the changing climate. This involves a lot of the same activities - assessing and making changes across physical assets, operations and supply chain. Practically, it makes sense for organizations to take a joined-up approach and combine these activities, making them more cost-effective.
2) Identify physical risk hotspots in your supply chain
To get visibility of climate risk across their entire supply chain, organizations must work with their suppliers. Together they must share climate risk information and identify assets that are particularly vulnerable to climate-related risks and could create critical dependencies for operations.
Understanding where your vulnerabilities to climate events lie will enable your organization to set effective contingency plans to protect day-to-day operations. A 2020 study by McKinsey found that being prepared for climate events can reduce potential annual revenue losses due to supply chain disruptions from 35% to 5% in the case of significant climate events. Taking actions such as Increasing inventory stock, diversifying suppliers or changing supply chain routes where you have dependencies means that when critical infrastructure or supply chains are disrupted you can maintain business continuity.
3) Future-proof your organization by designing for changing climate conditions
One of the impacts of climate change is that as temperatures increase and rainfall patterns change, climate zones are moving polewards. This means that the climate your assets are located in now will not be the same in 10 or 20 years’ time. Organizations planning new assets should make sure climate change has been factored into the design.
It’s not just the local climate that will change. The infrastructure connecting your assets and supply chains, the regulations and policy determining standards and reporting requirements, and the customers using your products and services will change too. Failing to incorporate changing climate conditions into your strategy, assets plans, and operations will make your company increasingly vulnerable to climate hazards. To limit vulnerability, consider both existing and future challenges and incorporate physical risk into short, medium and long-term decision-making.
4) Ensure your carbon offsetting investments have physical risk plans in place
One key component of many organizations' plans for reducing emissions is carbon offsetting. At COP26, nature-based solutions were cited as essential to achieving climate goals. However, it’s critical that organizations remember climate change also impacts the world's ecosystems, and physical risk to nature based-solutions is increasing too. In 2021, the western US, including California, the US’s largest carbon market, lost 7.1 million acres of forestry in wildfires. Organizations investing in carbon offsetting saw their carbon credits literally going up in smoke - and carbon stored in those forests re-entered the atmosphere. To compensate, organizations should build adaptation into due diligence processes and ensure that visible physical risk plans are in place for investments in nature-based solutions.
Climate change poses a significant risk to business continuity. To protect assets, people, operations and revenue organizations need to adapt with climate change, and get prepared for the impact of extreme weather events.
Enhanced knowledge on risks, impacts, and their consequences, and available adaptation options will help support businesses navigating the tricky landscape of climate risk and contribute to climate resilient development. As highlighted in the IPCC’s adaptation report, services and analysis tools like EarthScan™ that provide organizations with a detailed understanding of the specific climate risks they’re facing are a clear enabler of effective adaptation. Organizations can kick-start their climate strategies with access to climate intelligence.
To get started on your Climate Intelligence journey, sign up today for our free EarthScan Starter program.
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