What is climate risk and how do we manage it?

For humans, the word ‘risk’ has long been associated with physical danger. We know it isn’t wise to go swimming in a croc-infested river because there’s a decent chance we won’t get back out. But in business, risk is simply part of the daily landscape and encompasses anything that could affect performance. It can’t always be avoided outright; it must be managed.

Companies take risks to grow. Changes in consumer demand, skill shortages, staff sickness or injury, cashflow and supply-chain disruption form part of our normal business risk assessment. And now, so too should climate change.

It’s worth noting that climate risk, in this context, refers to external events that could impact your business. This is distinct from the reputational risk associated with consumer expectations around environmental or sustainability performance, though there is no doubt one can affect the other.

Generally speaking, climate-related risks encompass any external event or decision that a business has little if any control over. This ranges from the physical impacts of warmer global temperatures – increased adverse weather events, rising sea levels and so on – through to the socio-economic impacts that could follow. It also includes potential regulatory changes that Governments could impose to meet national carbon reduction targets, for example, increased fossil fuel taxes or new compliance and reporting requirements.

In a globally connected economy, any weather event or policy change in a country your suppliers or customers reside in can affect your ability to operate and be profitable. For example, we are now seeing insurance companies and local councils evaluate their exposure to coastal assets and how that will affect policy premiums and rates. Similarly, global energy costs are forecast to rise as we invest in renewables infrastructure and transition to electric vehicles.

Given the many potential risks in play, how do we manage them?

The risk profile across our business community varies significantly. For some, climate change fits neatly within their existing resilience or continuity planning, where the major threat is internet or power disruption, the collapse of their supply chain or losing their major customers. For others, climate threats are more existential. Winegrowers face different risks to clothing retailers, as do builders compared to law firms. But each understands their own vulnerabilities.

The question every business needs to answer is: what is your climate risk? If you can’t articulate it, then you can’t manage it.

The best way to approach this isn’t to think of every possible scenario that could affect you, just the big-ticket items. For example, would the market let you increase prices to cover a 20% increase in electricity or shipping costs, or would you need to absorb it? How would a ban on gas affect you? Can your farm or orchard handle double or half its normal annual rainfall in any given year? Are you at risk of technological disruption that stems from climate adaptation?

Most companies operate a risk register, so adding climate considerations to this is not a major imposition. More importantly, it is now best practice. While reporting requirements are currently only in place for publicly-listed companies and large financial institutions, investors and customers of all sizes increasingly want to know that your business understands how climate change affects it, and you have plans in place to mitigate the worst impacts.

Need a credible pathway to measuring and managing your carbon footprint? Learn about Toitū certification and how it enables organisation to take credible climate action.