By David DeMoss
According to the World Economic Forum (WEF), extreme weather events are among the top 10 global risks of doing business. As data shows, natural disasters are becoming more and more frequent. Not only does this mean that areas most commonly known to be affected by these disasters are having to deal with the consequences more often, but new areas and people that have never had to worry about extreme weather will soon be among those affected. Is your business prepared to deal with the adverse financial impact of changing climates? Most CEO’s don’t feel they are. Below, Katherine Klosowski discusses the importance of businesses building resilience and being prepared for these changes.
No area of the world is immune to the effects of natural hazards. Different geographies experience recurring earthquakes, typhoons or hurricanes, floods, and wildfires. Risk professionals can make a difference by better understanding these risks and helping their organizations to adapt and become more resilient.
Even as scientists strive to better understand connections between a changing climate and specific events, new data from the WEF shows that climate concerns are growing. In October, data from the WEF found that natural catastrophes and extreme weather events were among the top 10 rising global risks for doing business. And those events are happening more often in populated areas, where businesses and people are at risk. 2020 is shaping up to be a record year for named windstorms and wildfires, after near-record catastrophe losses in the past several years.
The need for resilience is greater than ever. A recently released FM Global survey found nearly 80% of CEOs and CFOs believe their companies are not fully prepared for the adverse financial impact of a changing climate. Only 23% — less than 1 in 4 executives — consider their firms to be prepared. In addition, 86% say addressing climate risk is a medium to high priority for their business.
The three climate risks that concern CEOs and CFOs the most and also could have the greatest financial impact, according to the FM Global survey, are flooding, drought and wildland fire/bush fire. It’s not hard to see why. Even if a business’ operations in one locality are not directly impacted, natural hazards can disrupt its supply chains elsewhere on the planet. Those impacts can result in a variety of negative outcomes, including financial losses, reduced productivity and loss of customers.
The near-term effects of climate risk, in the form of flooding, for example, can have longer-term implications beyond the physical impact, such as:
- Shareholder value. A recent FM Global-commissioned study found that shareholder value declined an average of 5% in the year after 71 public companies reported financial damage from a major flood event, equivalent to a collective US $82 billion. The erosion of shareholder value was found to occur as a result of investors’ lowered expectations of future cash flow, not the cost of the flood damage itself.
- Environmental impact. A flood can deposit silt, chemicals, sewage and other debris. Once the water recedes, businesses face the task of cleanup — and potential responsibility for third-party property damage. Removing contaminants and restoring operations while ensuring compliance with environmental regulations can be complex and expensive.
- Rethinking business operations. A flood or other event may force businesses to revise their operations and processes to avoid future natural hazards. For example, a business with flood-damaged equipment might consider repairing or replacing it, or relocating those operations to sites with less exposure.
Ensuring business continuity
A key question for any business that might experience a disruption from a natural catastrophe should be, “Can we continue to serve our customers if we suffer downtime?” As risk professionals are well aware, the ability to recover quickly and resume operations can be the difference between a thriving business and one struggling to remain competitive.
Preparation is critical to resilience. Risk professionals are skilled at understanding risks to their organizations and planning for loss mitigation. Where risk professionals can deliver even greater value is to ensure resilience and business continuity by preparing for previously unimagined risk scenarios.
Most [losses] stemming from climate-related events are preventable, and loss prevention can help preserve a company’s value and resilience, especially during the COVID-19 pandemic. The challenge many companies face is adequately preparing for such events given the ongoing distractions that the pandemic presents. This could exacerbate the impact that climate-related events have on an organization’s already fragile bottom line. Few organizations would stomach such volatility.
Naturalist Charles Darwin is famous for his theory of evolution and natural selection, which is often summarized as “survival of the fittest.” Darwin observed that organisms that adapt best to their environments are the most successful in surviving and producing future generations. In a similar way, businesses that adapt to the risks in their environment are the most likely to be resilient to climate risk and to sustain their operations. It’s a useful lesson for risk professionals now and in the future.