If the COVID crisis has taught us anything, it’s the importance of business continuity planning.
Those who had prepared ahead of time for circumstances that might prevent staff from accessing their offices will have been easily able to pivot to working from home, adapting plans that had been written with quite different risks in mind. While we can’t necessarily be prepared for all eventualities, risk management is essential for resilience and organisations with robust plans are likely to fare better when the unexpected happens.
In this blog post we identify some key areas for climate risk management to consider if you have not done so before, followed by a simple three step approach to get your company engaged on the issue.
1. Climate Risks are closer to home than you think
The recent extreme weather in the UK has highlighted a number of the potential risks posed by climate change over a remarkably short period.
- During August 2020 an extended dry spell, extremely high temperatures followed by excessively heavy rain have all taken their toll, with different parts of the UK having suffered wildfires, floods and landslides. Sadly in Scotland a landslip led to loss of life through a train derailment; meanwhile Hammersmith Bridge in London had to be closed due to damage caused by extreme heat.
- With the shift to home working during the extreme temperatures many people struggled to stay productive working in non air-conditioned homes. Building stock in the UK is not designed for these longer periods of extremes and even artificially cooled workplaces can become uncomfortable when temperatures exceed design specifications.
These examples show just home productivity and business operations can be affected by the impact of climate change right now; and these risks are only expected to increase in the future.
2. Regulatory requirements
While Streamlined Energy and Carbon Reporting legislation already requires large companies to report on their carbon emissions, disclosure on climate risk exposure and mitigation won’t be mandatory until 2022. However, managing climate risk is not just a regulatory issue but a strategic one. Failure to take appropriate measures in a timely fashion could leave an organisation exposed to both direct and indirect business risks. Climate change can no longer be considered a long-term risk; it is directly relevant to today’s business decisions.
3. Breaking down climate risks
In its 2017 risk assessment, the UK’s Committee for Climate Change identified almost 60 individual risks and opportunities, with the focus primarily on physical risks. Physical risks are those directly relating to changing climate and weather patterns, such as flooding, other storm events, extremes of temperature and the impact of associated damage to infrastructure. These break down into acute physical risks, eg storms and heatwaves, and chronic risks, such as gradually rising sea levels caused by melting sea-ice or water stress due to changing weather patterns. During the writing of this piece, a report was published in Nature Climate Change in which scientists confirmed Greenland and Antarctica are melting at rates matching the IPCC’s “worst-case scenario” predictions.
From a commercial perspective it is also important to consider transition risks: changes to policy or trading environment in response to climate change, for example the introduction of new carbon taxes, altered customer behaviours or disruptive technologies. The CCC is now in the process of updating the UK Climate Change Risk Assessment, with a new report due to be published in summer 2021. Its findings, together with the policy developments needed to deliver on the UK government’s commitment to net zero emissions by 2050, are bound to lead to increased regulatory measures on decarbonisation.
Materiality is fundamental to understanding and managing climate risks, since individual risks can have very different impacts on different types of organisation and in different locations. The standard methodology for assessing materiality is to plot the probability of each risk occurring against the severity of its impact, viewed from the perspective of the organisation and its stakeholders. This exercise requires scenario planning to model the potential severity of different climate change impacts since we cannot be certain about the frequency of extreme weather events or the rate at which chronic physical risks will manifest; equally uncertain is the pace at which policymakers will apply the necessary policy levers to decarbonise the economy which create transition risks.
Recently introduced FCA guidance for financial institutions recommends that they consider environmental, social and governance factors before deciding whether to insure, invest in or lend to a corporate customer. Therefore, organisations that manage these risks better will encounter fewer obstacles to growth. Furthermore, there is evidence of growing customer preference for companies that can articulate how they are adapting their strategy and business model in response to climate change. Therefore, having a coherent climate risk strategy can not only improve resilience, it has the potential to become a genuine source of competitive advantage.
5. Recommended approach
If you haven’t yet considered climate risk in your risk management approach, it is not wise to wait until something happens before adding it to your risk register. As climate risk is an evolving issue, the register needs to be reassessed and updated at least annually. You can start right now with these three steps:
- Use the Committee for Climate Change’s Synthesis Report to identify the climate risks that might impact your organisation.
- Conduct a materiality assessment to determine which of risks are most significant for your business operations, by plotting likelihood of the risk occurring against its potential impact.
- Prepare for the most material risks by putting in place contingency plans to mitigate against them.
BY TRACEY RAWLING CHURCH