Climate risk is not a distant threat

Organisations are beginning to take climate risks more seriously as the impact of extreme weather is affecting physical assets as well as workforces and supply chains. But while companies are concerned about climate risk, not all organisations are looking to build resilience or commit to adaptation.

Marsh’s recent Corporate Climate Adaptation Survey found that organisations are already feeling the financial impacts of increasing physical climate risks: 50% of respondents reported they had suffered from extreme weather events in the past three years, with tropical storms (typhoons, hurricanes, and cyclones) and river flooding causing the greatest impact.

However, Marsh said its survey suggests that many businesses and organisations see climate adaptation as something that will only really be relevant to them in the future. And a recent survey by International SOS Foundation found that just a third of firms (36%) have comprehensive plans and policies in place to deal with extreme weather events, and well over half (57%) haven’t even conducted risk assessments on such threats.

Climate disclosure

There are a number of requirements for companies to make climate disclosures, which might suggest they need to be making assessments and plans, but it seems that for many, it is simply a compliance issue rather than something driving real change. Indeed, a WTW report, Going beyond disclosures: Why it’s time to rethink how we consider and respond to climate risks, states: “Climate disclosures are in danger of ticking boxes while the earth system passes critical thresholds. To achieve climate resilience, organisations need to better understand the risks and realities.”

It points to generic statements, significant underestimates of risk and a lack of detail on plans to meet targets, and “many disclosure activities are not supporting organisations’ ability to address and adapt to physical climate risks or develop management plans to navigate and accelerate the transition”.

WTW points to the global roll-out of climate and sustainability reporting and the likes of the Taskforce on Nature-related Financial Disclosures, but says concern is growing on whether outcomes from these exercises are meeting their original objectives: to help companies and stakeholders respond to the risks and opportunities from climate change

Amar Rahman, global head climate & sustainability solution, Zurich Resilience Solutions, says the climate disclosure process should be considered as a documentation of the existing risk management process, which includes climate change-related impacts. “Effective climate disclosures provide transparency and accountability, encouraging companies to integrate climate risk into their strategic planning. They help identify vulnerabilities and opportunities, leading to more informed decision-making and ultimately driving meaningful action towards sustainability,” he says.

Rahman adds that companies should recognise that disclosure is just the starting point. “Building resilience requires a proactive approach, integrating climate risk assessments into business strategies and investing in adaptive measures. To ensure ownership, development and implementation of such adaptive measures, companies need to align their internal stakeholders and provide clear definitions of climate related risks. Encouraging a culture of resilience through leadership, education and collaboration can help bridge this gap and ensure long-term sustainability,” he says.

Distant threat

One of the big issues with climate risk is that it can be underestimated by companies and seen as a risk perhaps too far in the future to deal with now. Marsh points to the challenge of building a business case to address a risk that is uncertain or may not eventuate for ten years or more.

“Climate risk is still often perceived as a distant threat, but in reality, climate impacts are evident today and will intensify over time,” says Rahman. “Companies need to consider climate change from operational and strategic perspectives and adopt a forward-looking perspective, understanding that early action can mitigate future risks. By recognising and understanding the immediate and long-term implications of climate change, businesses can better prepare and protect their assets, operations, and stakeholders.”

Climate risk not only impacts infrastructure and assets, but also employees and supply chains. The Marsh survey confirms that for organisations, climate hazards pose a threat well beyond physical assets, with participants experiencing impacts on their operations and people (33% of respondents); supply chains (20%); customers (20%); critical infrastructure (20%) and local communities (14%).

Rahman notes that climate risk impacts are multifaceted and can affect all areas of a business and all its stakeholders. He says the biggest impact often depends on the complexity of the business, and its geographical footprint. For instance, companies with extensive physical assets in vulnerable areas may face significant infrastructure risks, while those with complex supply chains might experience disruptions, even if their own sites are not directly impacted.

“It is essential for companies to conduct comprehensive risk assessments to identify and prioritise the areas most at risk, in order to plan the right adaptation measures,” he says.

He explains that companies can begin assessing climate risk by conducting a thorough analysis of their operations, assets, and supply chains. A climate risk assessment involves evaluating exposure to physical and transition risks, understanding vulnerabilities, and estimating potential impacts, and tools such as climate models, scenario analysis and risk mapping can provide valuable insights.

WTW recommends that organisations refocus climate efforts in two ways: “Broadening the focus to the wider systems in which your business plans operate, and sharpening your climate risk view to make it useful to delivering financial and operational resilience. In this era of change, an over-reliance on simplistic models that don’t reflect the dynamic environment is unwise, while individual, qualitative judgements will continue to fall short.”

Need for adaptation

There is beginning to be a recognition of the need to build resilience and to focus on adaptation, but as always there is a cost and often this is seen as too great for a perceived distant risk.

The Marsh survey suggests that around four in ten companies (43%) still see adaptation simply as a cost, rather than as a sound investment. “This signals the need for better understanding of adaptation as a cost-effective way to build resilience to future risks – as well as creating a more sustainable future,” says Marsh.

The survey highlighted the difficulties encountered by some respondents in “operationalising adaptation”. Some said that it remains hard to make risk identification and cost assessment tangible while others have found it challenging to make assumptions and justify the value of investment in adaptation.

So while the survey suggests that companies are considering a climate adaptation approach at the highest level, “many struggle to map and identify complex climate risks and some still see adaptation simply as a cost, while others find it difficult to justify investment to mitigate a risk that is ill-defined or feels distant”, says Marsh.

Rahman says that businesses and communities are realising that relying on insurance alone may not be a sound risk management strategy any more. “Many companies are increasingly focusing on adaptation as they recognise the necessity of building resilience against climate change impacts.”

He notes that adaptation involves implementing measures to reduce vulnerabilities and enhance the capacity to cope with climate-related changes, and says this needs to be tailored to specific assets and can include infrastructure upgrades, diversifying supply chains, investing in employee training and adopting sustainable practices.