The “Instability Ingredient” and Business Risk

Businesses have always had to predict and manage risks. Those risks include the potential impact of extreme weather such as floods, storms and drought on a company’s supply chain, power supply, and property.

But now companies must find a way to factor in the “instability ingredient” — climate change — which is likely to make weather more unpredictable, extreme — and costly — in the future.

For example, farms, automotive and electronics plants in Thailand were devastated in 2011 in the worst flooding in half a century. Insurers estimated total costs of the floods at up to $20 billion. For one company, Intel, the floods interrupted the supply of hard drives, reducing revenues by about $1 billion and driving up hard-drive prices 28 percent in one quarter. Those prices aren’t expected to fall to pre-flood levels until 2014.

Individual companies’ losses are just one part of the multibillion-dollar costs of extreme weather events such as Hurricanes Sandy and Irene, historic flooding and drought, and record heat waves.

At a recent C2ES workshop, business leaders shared examples of emerging strategies to address these risks and avoid the costliest effects of climate change.

Most large companies have developed business continuity plans and emergency preparedness responses to deal with extreme weather events. Some leading companies are going beyond examining these risks based only on past weather events and are focusing on what the “new normal” of extreme weather is projected to become.

These companies are supplementing publicly available information with their own studies, exploring the impacts in a particular region, around a particular facility, or in a key market. The Hartford insurance company is supplementing its own extensive historical records of disasters and damages with data from associations like the Insurance Information Institute. Entergy commissioned a study of impacts for its service territory and both Entergy and Rio Tinto are partnering with universities and stakeholders to better understand local impacts, develop capacity, and ultimately build greater business resilience to impacts.

But many companies are challenged by the lack of information at the regional and local level about changes in climate parameters that directly affect their businesses. More localized pictures of the impacts of a changing climate are still being developed. The cost-effectiveness of different measures to build resilience and adapt to those changes is still being evaluated. Analytical tools are needed to incorporate this information into facility-level decision-making.

For companies already experiencing the impacts of extreme weather events that are predicted to become more frequent with rising sea level and rising global temperatures, these uncertainties are a driver for developing business approaches to better manage risks and enhance resilience.