Exploring Climate-Related Business Risks

The climate crisis is changing the way we live and the way we work. In 2019, the UN’s International Labour Organization reported that 80 million jobs would be at risk if rising temperature predictions materialize, with productivity impacted by unliveable working environments.

Almost all industries are threatened by the effects of climate change, either directly or indirectly. One 2019 study has shown that the U.S. alone could lose USD 520 billion across 22 sectors due to global temperature rise.

For companies thinking about the ways the changing climate might affect their business, the risks fall broadly into three types: physical, transitional, and liability risks.

Physical Risks
The physical risks of climate change are those immediate threats that come from the physical environment. Flooding, hurricanes, drought, wildfires – these are all symptoms of the climate crisis, and can all cause physical damage to people, property and transport links. Major weather events have increased in direct correlation to the warming climate. Between 2000 and 2015, the global population at risk of flooding increased by 20-24 percent, while at the same time 700 million people are at risk of being displaced – as a result of drought – by 2030, according to the WHO.

Major weather events are already having an impact on business: 2017’s Hurricane Harvey was one of the costliest storms to hit the U.S., causing USD 125 billion of damage, while losses from drought currently cost the EU and UK around EUR 9 billion per year, and are projected to rise to EUR 65 billion per year if global warming is not curtailed. The agricultural sector is particularly exposed to physical risks. Both flooding and drought can pose a risk to crops and livestock, as do extreme cold and extreme heat. The Australian Bureau of Agricultural and Resource Economics reported that more than AUD 1 billion dollars have been lost by farmers in the 20 years to 2019 as a result of the changing climate, largely from drought.

The leisure industry, too, is another sector at immediate physical risk from climate change. Ski resorts are seeing shorter seasons as rising temperatures reduce snowfall: almost all U.S. ski resorts could see a 50 percent shorter season by 2050, and up to 80 percent by 2090. While the U.S., Turkey and Australia are all losing tourism income as wildfires make large and popular hiking regions unsafe – a situation exacerbated by the COVID-19 pandemic that highlights how global risks are interconnected.

Transitional Risks
Transitional risk comes from the potential cost to businesses with the introduction of policy, laws, and other regulations designed to address climate change. Transitional risks can also arise from changes in technologies and consumer trends, which may also lead to reputational risk as wider society changes its view on ethical business practices. And as sectors move away from activities that contribute to climate change, they risk being left with stranded assets – a piece of land, property or equipment whose value has deteriorated.

The energy industry is one sector particularly open to transitional risk. With the push for greener energy sources, governments are increasingly shifting to a reliance on renewable energy sources, and demanding net-zero carbon emissions from energy producers. With a combination of the pandemic, a push for clean energy and uncertainties associated with carbon pricing, profits in 2020 were down across the sector.

The mining sector is also open to transitional risk. Precious metal mining, for example, could be at financial risk from policies that introduce carbon pricing. The negative effects of mining on the climate and the environment are increasingly becoming a reputational issue for mining companies, with investors nervous of businesses that could cause reputational harm by association.

Liability Risks
Liability risks arise from a failure to mitigate, adapt to, disclose, or comply with changing legal and regulatory expectations. Climate litigation is increasing worldwide, reflecting advances in attribution science, evolving legal disputes, and changing public sentiment. It is also being driven by a greater focus from regulators and investors wanting to ensure businesses provide necessary disclosures and comply with an ever-evolving regulatory landscape.

Companies that pollute are obviously exposed to potential litigation. But so are companies that fail to consider future climate change in their products and services. For instance, structural engineers or property developers that fail to consider increased intensity of rainfall in design of drainage systems.

How to Respond to Risks
There are well-established risk management processes and approaches to help businesses build resilience against climate risks. They essentially cover three steps:

• Identify the broad business and strategic risks
• Develop a granular view of the risks involved
• Develop a mitigation strategy

It requires a significant shift in the way companies manage their approach to climate resilience and adaptation. Climate risks should be considered core business risks, and their mitigation part of business strategy. As the effects of climate change, and the risks they pose, are ever-changing, analysis for risks should be regularly carried out. These steps could lead to investing in new technologies or moving into new areas of the industry.

Some of the biggest names in energy are rapidly pivoting in these ways: BP have bought 9 gigawatts of solar energy projects in the U.S., while Exxon has announced an investment of USD 3 billion in carbon capture technology to reduce their emissions.

When facing physical risks, these changes might mean finding new opportunities in the new environment, like the Arosa ski resort in Switzerland, which is developing its summer tourist model to draw in crowds now that they are seeing decreased snowfall in winter. Resorts are also embracing technology, such as cloud seeding, to nudge clouds into dropping snow, and even wind powered snow machines that work at above zero temperatures.

Businesses are Leveraging Help
Businesses should aim to collectively develop climate risk solutions by leveraging expertise, and considering the needs of other stakeholders, including academia, regulators, government bodies and communities. Organisations looking to implement risk strategies and safeguard themselves in the future may find it beneficial to consult external professional help. Risk management companies, like Priavo Security, are experts in assessing risks that companies face, providing realistic end-to-end risk mitigation strategies tailor-made to individual requirements. They can help businesses navigate the risk assessment process – developing policies and procedures to suitably manage rising climate security threats.

If you require a confidential discussion please contact us at enquiries@priavosecurity.com.