Climate change is a business risk

Weathering the Storm: Building Business Resilience to Climate Change

Economic damages from weather-related disasters climbed to near-record levels in 2012, with over 800 major events worldwide causing an estimated $130 billion in losses. Munich Re reported that it was the third-costliest year on record behind 2011 and 2005. Many …

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We used to talk mostly about mitigation – using policy, technology and other actions to reduce the greenhouse gas emissions responsible for climate change. But increasingly we also have started talking about resilience – making sure our public and private infrastructure can withstand the changes in the climate that we can’t avoid.

That’s because climate change is no longer a far-in-the-future possibility; it’s a right-now reality. Sea level is rising and global temperatures are higher. Climate scientists tell us to expect more frequent and intense heat waves, more severe droughts in some regions, more expansive wildfires, and more intense downpours.

Many of these changes can exacerbate the types of extreme weather that can cause costly impacts. So all of us — individuals, communities, governments and businesses — need to figure out how to deal with the impacts we’re already experiencing, and the ones to come.

After releasing our report, Weathering the Storm: Building Business Resilience to Climate Change, we have been talking about resilience at several forums, including Climate Week NYC and most recently at the annual conference of the National Association of Corporate Directors (NACD).

NACD convened more than 1,000 corporate board directors and C-suite executives at its conference and I was pleased to join NACD Managing Director and Senior Advisor Jeffrey Cunningham and American Water CEO Jeff Sterba for a discussion on “The New Face of Global Risk.”

In our discussions at NACD and other business forums, the questions generally fall into two broad categories: What climate risks do I face? And what steps should I take to address them?

Each company’s risk is different. But what companies tell us they worry about is having more frequent and intense extreme weather close facilities, delay production, disrupt supply and distribution chains, raise operational and capital costs, and reduce demand.

Companies also worry about risks they can’t directly manage – those that are outside “their fenceline” but that can significantly affect the bottom line. Extreme weather can keep employees from getting to work, disrupt transportation and communication systems, and threaten power and water supplies.

Jeff told our NACD audience to focus on the supply chain, production facilities, and distribution, and also something every company uses: electricity. A recent Department of Energy report warns about the risks extreme weather poses to our energy system, but the risk could be as close to home as having electrical equipment in a flood-prone basement.

Companies are also learning first-hand that even when their own risk assessments take climate change into account, their operations can still be disrupted if their suppliers haven’t taken the same steps. For example, devastating floods in Thailand in 2011 shut down auto assembly plants and electronics suppliers for major international companies.

At the NACD conference, I was repeatedly asked not whether climate risks exist, but what companies should do about them. It’s encouraging that more of our business leaders are acknowledging these risks, and we hope more join them.

Jeff and I told the audience the first step is to get educated about climate change; start asking questions and understanding the risks.

Our recent report outlines three more steps to assess and manage potential risks to supplies, operations, facilities, employees, customers, and costs and offers case studies of companies taking these steps. For example, American Water systematically assesses the water supply’s vulnerability to climate variability — along with estimates of population growth, urbanization rates, and other factors — to determine how much investment is needed to meet future infrastructure needs. Many of these companies are also sharing what they’ve learned through our free C2ES webinars.

Jeff concluded with what I’d call Step Five of the process. After companies assess the risks to their supply chain, production facilities, water and energy sources, and distribution, they should ask themselves: Does this rise to the level where we want to become active in promoting stronger climate action?

Businesses are being affected by this problem and they can also be part of the solution, by becoming more energy efficient, developing new technologies, investing in a low-carbon future, and supporting common-sense policies to help us both reduce greenhouse gas emissions and build resilience to climate impacts.