Don’t get left behind in the race to deal with the next global risk event - Climate Change

As businesses emerge from the Covid-19 crisis, their focus must now be drawn to dealing with the next major global risk event: the climate crisis. The World Economic Forum’s 2021 Global Risks Report paints a clear picture of how pressing climate risk is: the report demonstrates that extreme weather, climate action failure, and human-led environmental damage are all risks which are going to be prominent in the 2020s and beyond.

The UN Environment Programme also estimates that the global costs of adapting to climate change will grow significantly in the coming decades, ranging from $140-300bn per year by 2030 with an exponential rise to $280-500bn per year by 2050.

The scale of the damage caused by natural catastrophe events is becoming increasingly evident. One revealing example of this comes from the recent devastating deep freeze event which hit Texas and parts of northern Mexico.

Early estimates claim that the physical damage caused by the freeze amounts to roughly $35bn in losses. The Met Office has also reported that climate change is contributing to the recent cases of extreme weather seen in Britain, demonstrating how even relatively stable climates are not immune from experiencing natural catastrophes.

Acting now to safeguard and mitigate against climate risk will stand to benefit organisations in the long term; one of the many things we have learned from the Covid-19 crisis is that those businesses who were prepared have been able to perform better through the crisis.  

The first step organisations should take involves business leaders recognizing the degree to which their organisations are exposed. This will allow them to understand how climate change might affect their business operations, subsequently making it easier to implement the right form of targeted strategies that will deliver results.

Making an investment in protective solutions that secure a facility against windstorm damage, shielding key equipment from potential flood damage, or putting measures in place to help mitigate freeze – these are all great examples of how physical preventative measures can make a real difference, and be the difference between a minor disruption and a business facing a catastrophic loss event as a result of a natural hazard.

Another key step businesses should consider is to develop up-to-date business continuity plans to address the impact that climate risk could bring. Such plans need to provide practical guidelines and sufficient detail, so that when a company experiences a crisis it is ready to act with both speed and intelligence. Business continuity plans should be underpinned by strategies which help to ensure the effective delivery of critical products and services. Where necessary, the plans should include giving people responsibility and authority to take clearly defined actions that can protect a facility and the wider business, adapting to the situation at-hand if needs be.

Fostering the right form of organisational culture is also of critical importance. Having a risk-aware culture means that risk managers can gain buy-in from senior executives when it comes to making an investment in resilience driving solutions. Members of the C-suite, particularly the CFO and the COO, need to be engaged with the process of making an organisation more resilient, since these are the individuals who actually determine where funds should be allocated.

For this reason it is vitally important that risk managers can speak the ‘language’ of the C-suite, so they can understand why the proper investments need to be made. A recent FM Global study demonstrates that this is not an easy task for risk managers, as over 80% of CEOs and CFOs at the world’s largest companies believe that they have little to no control over the impact of climate risk on their business.

There are certain strategies which can alleviate this issue. Risk managers should look to communicate to the C-suite using clear financial metrics which show the potentially devastating impact climate risks can have on their businesses, while also highlighting the simple solutions that can dramatically improve resilience.

FM Global’s Total Financial Loss (TFL) Modelling is one tool which can assist with this process. The tool enables risk managers to demonstrate the potential impact of an event at a facility when it comes to the overall shareholder value. This allows risk managers to highlight the value of the investment in risk mitigation actions in language that will grab the attention of the Board. TFL Modelling accounts for all aspects of a loss, including intangible aspects like reputational loss, and provides an estimate on the full impact the disruption could have on a business’ value.

Using tools like this will be essential for risk managers in 2021, helping them to communicate where investments need to be made to effectively mitigate climate risks. In contrast to Covid-19, businesses already have an extensive amount of data available to help them take the necessary steps that will ensure continuity and property protection should a natural catastrophe strike. Although it can be difficult to predict how exactly climate change related risks might impact a particular facility at a micro-level, businesses that plan ahead and prioritise resilience will find these risks are substantially more manageable.

Adriano Lanzilotto, Vice President and Client Service Manager at FM Global