Climate Risk and What You Should Be Doing Now to Build Resilience
Updated: Feb 27
“Firms ignoring the climate crisis will go bankrupt” – Mark Carney, then governor of the Bank of England, famously declared in 2019 (D., Carrington, 2019).
In other words, those companies failing to move towards net zero emissions and failing to take climate risk into account will not survive.
But what exactly is climate risk, how does it impact your business, and what measures can you take to build resiliency?
Simply put, climate risk is financial risk related to our changing climate.
Climate risk can be divided into two types of risk: transition risk and physical risk.
Transition risk is the risk inherent in transitioning to a low carbon economy to mitigate the impacts of climate change. The Task Force on Climate-Related Financial Disclosures (TCFD) recommendations divide transition risk into four categories: policy and legal, technology, market, and reputation.
Policy and Legal Risks
Policy risks can stem from changes in policy that aim to mitigate the effects of climate change or promote adaptation to climate change (TCFD, 2017). For example, carbon pricing mechanisms, such as the Canadian federal fuel charge (currently sitting at $65/tonne of CO2e and rising to $130/tonne CO2e by 2030) make the combustion of fossil fuels more expensive over time with the goal of reducing their use and related GHG emissions.
Another increasingly important risk is legal or litigation risk. In recent years, there has been an increase in climate-related litigation claims related to the failure of organizations to mitigate the impacts of climate change, failure to adapt to climate change, and the insufficient disclosure of material climate-related financial risks. As extreme weather events become more frequent and intense, litigation risk is expected to increase (TCFD, 2017).
Technological improvements and changes will be necessary in the transition to a lower carbon economy, and these technological changes can have an impact on an organization. Those organizations developing technologies, such as renewable energy or battery storage, will benefit as we transition to a lower carbon economy, while other companies will be left behind as newer technology displaces or disrupts older technology.
Markets will be affected by climate change in a variety of ways, including shifts in supply and demand for certain products and services as climate-related risks and opportunities are considered (TCFD, 2017). We are already seeing changes in supply for products that stem from supply chain disruption due to flooding or drought conditions. For example, in April 2022, water levels on the Rhine River in Germany were so low due to a long-term drought that cargo ships were forced to load no more than half their usual capacity to avoid running aground. (J. Leslie, 2022).
Reputational risk can arise from changing perceptions of customers or other stakeholders related to an organization’s contribution to the climate crisis or its ability to support the transition to a lower carbon economy. These risks could include shifts in consumer preferences and/or stigmatization of a sector.
Physical risks occur from changes in climate patterns and can be divided into two general categories: acute and chronic. Acute physical risks are event-driven and include extreme weather events, such as flooding, hurricanes, and wildfires. Chronic physical risks occur over a longer time period and include gradually increasing sea level rise and global temperatures. Physical risks can pose significant financial risks to businesses. These risks can include physical infrastructure damage due to flooding, high winds, ice storms or fires and higher cooling costs in the summer. Businesses and supply chains can be disrupted due to extreme weather, causing power outages and lack of access and resulting in lost revenues and productivity. Droughts can cause water availability concerns for industries heavily dependent on water for their processes, like the agricultural and beverage manufacturing sectors, and can disrupt key shipping routes.
While businesses of all sizes can be negatively impacted by physical climate risks, small businesses are particularly vulnerable. They often lack the financial resources for recovery after an extreme weather event, have less ability to spread their risk across several geographic locations, and may lack ready access to alternative suppliers (ICLR, 2007).
While there is a myriad of climate-related risks, there are also a host of climate-related opportunities, some of which may attract incentives from government, utilities, or other sources. The TCFD guidelines categorize these opportunities as:
improvements to resource efficiency (i.e., cost savings from using less materials, water, and energy and generating less waste);
use of new energy sources, like wind and solar, which will save on annual energy costs;
development of new low emission products and services to support the transition to the low carbon economy;
access to new markets, which may allow organizations to diversify activities; and
building resilience to respond to climate change, which will allow organizations to avoid unexpected costs, manage risks, and make the most of opportunities.
The Benefits of Building Resilience
By identifying and managing your transition and physical climate-related risks, you can build your company’s resilience to climate change. Some of the benefits of building resilience include:
Preparing for and minimizing business interruption from power outages and extreme weather;
Avoiding the cost of infrastructure damage;
Prolonging asset life and increasing property and asset value;
Reducing liability exposure (directors, engineers);
Minimizing threats to water and land quality;
Protecting company reputation; and
Minimizing financial impacts of increasing fuel charges and other carbon taxes.
What Can Businesses Do to Get Started?
Here are some steps your business can take to start managing your climate-related risks:
Appoint a climate champion. Ideally this should be a senior leader or owner of the business.
Educate leadership and staff about climate change, and associated risks and opportunities.
Establish roles and responsibilities for leadership and management to deal with climate-related risks.
Put in place a process to identify, prioritize, and manage climate-related risks and identify opportunities. If you have an existing enterprise risk management process, try to use it to consider climate-related risks.
Set metrics and targets for GHG reductions and for building resilience.
Most importantly, just get started!
Ways to Build Climate Resilience
There are lots of ways to build resilience to climate change. Here are four ways that may be applicable to most Canadian businesses:
Assess your carbon footprint and take action to reduce your greenhouse gas emissions.
To minimize supply chain disruptions, identify backup suppliers and have products in reserve.
To plan for a power outage due to extreme weather, ensure you have back-up power, that you have regular computer backups, and remote work options for your staff.
As flooding is a key climate hazard in Canada, be sure to elevate or relocate key equipment on floors vulnerable to flooding and consider purchasing overland flood and /or sewage backup insurance. Ensure that there is proper grading around your building or facility and that catch basins are unblocked. Be sure any raw or waste chemicals or fuels are stored securely to avoid spills in the event of extreme weather.
We Can Help!
Achieve Sustainability can help you identify transition and physical climate-related risks and opportunities, analyze and prioritize those risks and then take action to manage the risks to improve your company’s competitive advantage and build resiliency.
Reach out today for a complementary consultation firstname.lastname@example.org, and sign up for our newsletter for more blogs and news related to climate risk and sustainability.
D. Carrington, “Firms ignoring the climate crisis will go bankrupt”, The Guardian, Sunday Oct. 13, 2019. https://www.theguardian.com/environment/2019/oct/13/firms-ignoring-climate-crisis-bankrupt-mark-carney-bank-england-governor. Retrieved on Dec. 7, 2022.
Task Force on Climate-Related Financial Disclosures (TCFD). June 2017. Recommendations of the Task Force on Climate-related Financial Disclosures. https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf Retrieved on Dec. 12, 2022.
Institute for Catastrophic Loss Reduction (ICLR), 2007. Open for Business. A Disaster Protection and Recovery Planning toolkit for the Small to Mid-Sized Business.
Leslie, J. 2022. How Climate Change Is Disrupting the Global Supply Chain. https://e360.yale.edu/features/how-climate-change-is-disrupting-the-global-supply-chain. Retrieved on December 9, 2022.