Physical climate risk to businesses
Jan 31, 2023 / Blog
The response to climate change can be categorised into two approaches - mitigation and adaptation. Climate change mitigation is already at the forefront of many businesses’ strategies, having gained traction over the past decade. Today, for example, 91% of the global economy falls under net zero pledges, up from 19% in 2019. Promises of net zero and an emerging 2-billion-dollar carbon credit market have invigorated action from governments and businesses alike. However, even under a best-case scenario, some degree of adaptation will be required. Physical climate risks pose a major yet often unappreciated threat to corporate assets and infrastructure.
Paris Agreement - adaptation is necessary
Achieving the Paris Agreement’s goal of limiting global warming to 1.5C – often heralded as an optimistic yet achievable target - will still put billions of people and dollars at risk. In a 1.5C scenario, half of the world's glaciers will melt, the Greenland and West Antarctic ice sheets are "likely" to collapse and the Labrador sea gyre may slow down, drastically altering the global climate. Each of these events will have serious consequences for society. Unfortunately, melting glaciers, collapsing ice sheets and sea-level rise are just the beginning: the amount of greenhouse gases in the atmosphere today will increase the frequency and intensity of extreme weather, impacting every aspect of business.
When risk becoming reality
A physical climate risk is the threat of extreme weather events, made more frequent and intense by climate change, to businesses' infrastructure or assets. Extreme weather events are on the rise - in the past century, the frequency of natural disasters has increased by more than ten times, now costing an estimated $383 million per day. Impairment or write-off of assets caused by climate-related damages will cost the world's 500 richest companies $250bn in the short to medium term. Despite these figures, analysis conducted by CDP revealed that businesses tend to overlook the potential impacts of physical climate risks, instead focusing on transitional risks.
Ignoring physical climate risks can have severe consequences. In 2011, Toyota fell victim to poor risk management when flooding caused the closure of three manufacturing plants in Thailand. The month-long closures caused disruption along Toyota’s supply chain, halting manufacturing in the US and slowing down production in South Africa, Indonesia, Malaysia, the Philippines, Vietnam and Pakistan. In total, the flood reduced Toyota's profits by 18.5% as output was cut by approximately 150,000 cars. Nissan, Honda, and Ford also suffered losses due to submerged manufacturing plants.
Closer to home
Of all weather events, flooding is the most frequent and damaging. London, like many of the world's major cities, is low-lying with a major river running through its centre. Two-fifths of London’s commercial buildings are at risk from flash flooding and this map illustrates the areas impacted by rising sea levels. Although the Thames is well-managed, with a detailed plan through to 2100, those with assets in London may consider some adaptive strategies. For example, simply checking the long-term flood risk in your area and signing up for flood warnings will give you an advantage.
Assessing physical risk
To gain a more complete overview of your business’s vulnerability and exposure to weather events, a climate risk assessment is required. This helps businesses identify and analyse the risks posed to their operations, enabling informed and timely decisions. Additionally, climate risk assessments will enhance a business’s score on its CDP disclosure, which improves reputation and credibility. For some, this process may have already begun - since April 2022, climate reporting in line with the Task Force on Climate-Related Financial Disclosures (TCFD) framework became mandatory for UK businesses with over 500 employees.
Climate modelling is one component of a risk assessment, affording an insight into a business’s future vulnerability to increased extreme weather events, such as drought, wildfire, sea-level rise or hurricanes, with models forecasting various scenarios decades ahead. It is worth noting that different variables produce different scenarios. For instance, sea-level rise can be modelled depending on a society's level of mitigation against climate change - be it business-as-usual, net-zero or carbon-negative emissions scenarios. Armed with this knowledge, business leaders can adapt or mitigate areas of their supply chain that are vulnerable to climate change or screen future sites for risk.
There is a range of companies, banks and financial groups offering physical climate risk assessments, alongside a well-established open-source literature base. Ecometrica provides TCFD-certified climate reporting, modelling, and monitoring. Their climate modelling product offers a global oversight of your and your competitors’ supply chains, with the option to monitor climate risks in real-time, short, medium, and long term.
Although this may all seem like doom and gloom, there are positives to be drawn on. CDP found that the value of opportunities presented by climate change outweighs the costs associated with it. Consumer demand shifting to low-emission, environmentally friendly products are the main financial drivers, while energy-saving technologies and resource efficiencies will cut a company’s outgoings. Doing business in the era of climate change means adapting to the risks, mitigating against future damage, and capitalising on the opportunities.