Addressing climate risk in the era of COVID-19
- Published: Friday, 22 January 2021 09:36
Although dealing with COVID-19 has understandably been the focus of many businesses over the past 12 months, businesses focussed on ensuring long-term resilience must look beyond this single threat says Andrew Bryson, Operations Senior Vice President at FM Global.
Concentrating on pandemic risks alone can mean missing other potentially significant hazards which have not gone away. The 2021 Global Risks Report, which was published this week, is very clear about this, calling for organizations to ‘wake up to long term risks’. The report says that among the highest likelihood risks of the next ten years are extreme weather, climate action failure, and human-led environmental damage. And among the highest impact risks of the next decade, infectious diseases are in the top spot, followed by climate action failure, and other environmental risks.
Clearly, climate change related hazards have not gone away and therefore, organizations need to continue to think strategically about how best to manage these risks, building resilience in an appropriate and sustainable manner.
Firstly, it is vital that business leaders understand the degree to which their organizations are exposed and can conceptualise how climate change might disrupt their business operations. With a greater understanding of the specific nature of the risk exposure at the individual location level, the easier it is to implement targeted strategies that will deliver results. Often the most effective solutions are physical loss prevention measures that protect the integrity of a building. For example, investing in preventative solutions that secure a facility against hurricane damage, protecting key equipment from flooding, and putting effective measures in place to help control fires, can make all the difference.
The scale of the damage these events can cause should not be under-estimated; the destruction wrought by hurricane Maria, which hit Puerto Rico in 2018, demonstrates this with recovery costs and associated impact to business amounting to approximately $139 billion. Facilities in similar high-hazard locations could be at risk, endangering business operations and associated revenue streams, unless investments to improve resilience are made. Businesses with a footprint traditionally outside the recognised high hazard zones, like the UK for example, are also not exempt from experiencing the negative effects of natural catastrophes. The Met Office has reported that climate change is impacting the recent cases of extreme weather seen in Britain. Particularly harmful was the flooding across different parts of the UK in both summer, autumn, and winter of 2019, which brought with it numerous cases of significant property damage.
Having the right organizational culture is also critical for any organization looking to combat the risks associated with climate change. The right culture leads to risk managers gaining buy-in from senior executives when it comes to making an investment in resilience. It remains critical that the C-suite, particularly the CFO, are engaged with the process of making an organization more resilient, and that’s why speaking the ‘language’ of the C-suite is essential for risk managers. Given that over 80 percent 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 (according to a recent FM Global study), it is clear that this is no small task.
There are, however, actions that risk managers can take to change this view. Specifically, risk managers should communicate the potentially devastating impact climate risks can have on their business, while at the same time highlighting the relatively simple solutions that can dramatically improve resilience thereby linking the returns that investing in risk mitigation can create. FM Global’s Total Financial Loss (TFL) Modelling is one tool which can help with this issue. The tool enables risk managers to determine the potential impact of an event at a facility in terms of overall shareholder value, thereby highlighting the value of the investment in risk mitigation actions using the language of the CEO or CFO. The model takes into account all aspects of a loss, including those that can be intangible, such as reputational loss, and provides an estimate as to the full impact the disruption could have on a business’ value.
This aspect of intangible loss is all too often overlooked. However, in today’s complex world, businesses must understand that insurance policies that merely cover physical assets are not always enough. Intangible assets can be equally impacted by a loss. For example, a major flood loss could cause investors to lose confidence in a company as its reputation suffers and investor confidence declines. The impact of this kind of intangible loss has been shown to have a significant impact on company value, according to a recent FM Global commissioned study.
In addition to physical risk management solutions, making sure that business continuity plans are up-to-date is also an essential task for any business looking to mitigate the risks associated with climate change. In the months since the pandemic changed our world, business continuity plans have been put to the test and many organizations have found themselves scrambling to create and adapt plans at short notice. The pandemic has served as a reminder about the importance of regularly reviewing continuity plans, as companies with up-to-date plans in place were able to quickly identify the most critical parts of their business – which markets should they be prioritizing, where can they reroute disrupted supply chains, what to do if staff can’t come into the workplace – and use this knowledge to generate a competitive advantage.
Businesses should take the learnings of the pandemic on board and flesh out business continuity strategies to address the impact that climate change could cause. These plans should provide practical guidelines and sufficient detail for when a company faces an issue. At the heart of every plan should be strategies which help to ensure the effective delivery of critical products and services to be maintained. Where necessary, the plans should include giving people responsibility and authority to take clearly defined actions that can protect the facility and the wider business, adapting to the situation at-hand.
In 2021, strategic thinking will be crucially important for any organization looking to mitigate the potential hazards climate change could cause. In contrast to the COVID-19 pandemic, businesses already have a wealth of data and expertise available to help them take the necessary steps to ensure continuity if a catastrophe does hit a particular facility. Many executives are certainly already aware of how devastating a risk climate change might become – they should use this knowledge, working in tandem with the risk function within their organizations, to make suitable investments which build resilience as well as create business continuity plans that allow operations to continue should a loss occur.
Although it can be difficult to say exactly how climate change related risks might impact each facility at a micro-level, businesses that plan ahead and prioritize resilience will find these risks are significantly more manageable.
Andrew Bryson is Operations Senior Vice President at FM Global.