Heat waves, storms, wildfires, and extreme weather events are no longer a rarity. Both globally and locally, climate change has now taken center stage. The top five long-term risks identified in the Global Risks Report 2020, prepared by the World Economic Forum with the support of Marsh & McLennan, are all related to the environment.
While greater recognition of potential climate risks is essential, merely understanding the threat isn’t enough. The time for action — by businesses, governments, and society as a whole — is now, before damage becomes irreversible. And tackling what might, at first glance, appear unsurmountable, requires strategic private-public partnerships and a long-term vision that prioritizes climate risk mitigation and adaptation efforts.
For businesses, climate change can have both direct and indirect effects. Beyond the impact on business operations and long-term capital investments, investors, employees, and customers, are pressuring businesses to become more sustainable. Just this month, a major investment management company announced a focus on sustainability as part of its core strategy.
As the threat of climate change and its ensuing risks become more acute, organizations should reexamine their business models and determine how they are holding up amid new challenges. While climate change will affect every organization differently, and there’s no one-size-fits-all solution to it, businesses should consider three actions to succeed.
Risk professionals’ role in protecting the organization is becoming increasingly relevant. As climate change and other major global risks grow in scope and evolve, and as companies adapt their strategies to keep up, risk managers will need to determine the potential effects on their organizations’ risk profiles. In seeking to protect their organizations from future risks, they will be tasked with identifying the most appropriate mitigation tactics and determining the best risk finance strategies, including ensuring adequate insurance coverage. They must also take a forward-looking view, considering the risks still on the horizon.
Quantifying the potential impact of your risk is crucial, especially when it comes to novel perils. Scenario-based loss modeling can provide specific insight into how different climate and environmental risks can affect your company and help you quantify their potential costs. Taking into account the potential impact of various scenarios — including black swan events — can help you develop effective strategies to protect your people and operations. Modeling should be forward-looking and aligned to your organization's strategy and we must create risk forecasts to inform forward decision-making.
A clear understanding of the effect of climate change on your business can better position you to build effective contingency plans, which should be regularly reviewed, tested, and, if necessary, adjusted. Examine the best ways to transfer risks that cannot be mitigated, including exploring event-based solutions that can respond to catastrophic weather events.
There is no doubt that climate change is a real threat to society and to businesses. Risk management departments, along with other stakeholders, must commit to addressing these perils and finding ways to manage their effects on operations.