How businesses can assess their risk and adapt to a changing climate
Weather has always had an impact on businesses. Tornadoes, floods, hurricanes, lightning strikes and other natural disasters can do major damage to a business whether it’s to the property itself or the company’s reputation if business is interrupted for any period of time.
And in a global economy, those risks reach beyond what happens in your backyard to what happens around the world. For example, a tsunami in Japan can impact the supply chain getting remaining placement parts for a camera brand. A flood that destroys an electronic components production facility in India could create a global supply shortage, devastating companies that rely on those components for their products. Or warming in the mountains in the Western U.S. could result in more flooding in the winter and less water available in the summer due to a lack of snow packs.
Despite these potential scenarios, few companies are addressing the risk posed by global climatic change. In a survey of S&P Global 100 companies by the Center for Climate and Energy Solutions, only 28 percent said they had done climate assessments; just 18 percent said they use climate-specific tools or models to assess their risks.
While it’s impossible to stop a flood half way around the world from impacting your business, there are things you should consider to prepare for potential climatic changes in the coming years and decades and their impact on your business.
According to McKinsey & Co., companies face six types of risk:
- Physical risk: Potential damage to infrastructure and other assets, such as factories and supply chain operations.
- Price risk: Price volatility of raw materials and commodities; for example, drought can increase water prices, and climate change could also create uncertainty regarding energy, transportation and insurance.
- Product risk: Changes to the context in which a business operates; for example, a ski resort located in an area that gets less snow because of chang
ing weather patterns.
- Ratings risk: Higher costs of capital as the resul
t of climate-related exposure, including carbon pricing, supply chain disruption and the obsolescence of products.
- Regulation risk: Evolving government requirements that could change the way a business operates and that could cost it more to comply.
- Reputation risk: Public perception of how your company does business could result in decreased sales, consumer boycotts or weakened investor relationships.
Companies need to carefully assess their business and the potential effects of climatic change, determine the implications it could potentially have on their business and plan for the future accordingly.
To identify and mitigate the risks to your business, carefully consider each of these areas and work with your insurance expert to determine how to protect your business.