3 types of climate risk for companies in the COVID-19 era

To survive and thrive in the 21st Century, companies must manage physical, transition and liability risks from climate change.

Over the past few years, I’ve been researching climate and disaster risk as a consultant at an inter-governmental organisation. While I’ve been involved in this space for almost a decade, the things I’ve learnt have never felt so relevant than they do today.

The COVID-19 pandemic has not only turned society on its head, but it has also served as a strong reminder of the Volatility, Uncertainty, Complexity and Ambiguity (VUCA) of the modern world — characteristics that embody the exact opposite of an ideal operating environment for business.

While many companies — both big and small — will not have the means to weather the storm, many of those that survive are fundamentally re-thinking and re-designing the way they do business. From diversifying supply chains to reducing office space and taking massive strides in digitalization, many companies are already undergoing significant change in response to the pandemic.

But why stop there? This crisis presents a major opportunity for both major corporates and SMEs to not only mitigate the impacts of COVID-19, but to also ensure their long-term viability in the face of climate change and ultimately play a part in building a more resilient and regenerative economy.

To make this happen, business leaders must consider three types of climate-related risk.

1. Physical Risk

Organisations can be exposed to both acute and chronic climate risks.

• Acute risks include extreme weather events, such as storm surge, typhoons and flooding
• Chronic risks are longer-term, including water stress, extreme heat, and sea-level rise.

Looking at Japan, where 46% of the population and 47% of industrial output are at threat from sea-level rise and associated impacts such as typhoons and coastal erosion, the need for managing physical risk is clear.

These can result in direct losses (e.g. loss of employees’ lives, damage to buildings and infrastructure), as well as indirect losses (e.g. declines in output or revenue).

For example, the severe flooding in Thailand in 2011 had a major knock-on effect on global auto manufacturers and electronics makers, serving as a strong wake-up call and warning of things to come.

By considering physical risk, companies can ensure employee safety, minimise material footprint, and build more resilient supply chains.

2. Transition Risk

Transition risks are those inherent in shifting towards a greener economy. These include factors like policy changes and technological innovations.

• Policy changes: As the push for decarbonisation continues, many sectors face major shifts in asset values or higher costs of doing business due to changing policy. Take a coal-fired power plant, for example. If the national government were to introduce strict regulations or introduce carbon-pricing mechanisms, this could quickly make it unviable.
• Technological innovations: The increasing competitiveness of renewable energy, battery storage, carbon capture and sequestration, and other innovations will make existing technologies less attractive or even obsolete.

These transitions could totally displace polluting companies and industries altogether in the not-too-distant future.

3. Liability Risk

Heightened public awareness around climate change, along with the introduction of a range of national laws, has inspired a new type of legal action: climate change litigation.

As of January 2020, there have been over 1,400+ climate litigation cases worldwide, namely in the USA, but also in countries such as Australia, UK, New Zealand, Canada and Spain. A few examples include:

• The Urgenda Foundation and a group of 900 Dutch citizens sued the Dutch government to compel the state to reduce emissions. This led to an order for the government to reduce GHG emissions by 25% by 2020.
• Rhode Island filed a suit against a group of companies that allegedly contributed to climate change and failed to adequately warn citizens about the risks posed by their products.

These kinds of lawsuits are creating concerns for both businesses and their insurers, and will likely only increase in number and scale going forward.

This means that businesses may no longer be able to get away with causing irreversible damage to the biosphere, with bad environmental behaviour turning off investors and consumers alike, and possibly even coming back to haunt them well after-the-fact through litigation.

As we navigate this public health and economic crisis, businesses have to adapt — whether they want to or not.

But it’s incredibly important to remember that if we fail to hold the increase in the global average temperature to below 2°C above pre-industrial levels, we will face previously unseen levels of disruption to markets, supply chains and social stability, making it even harder to reverse the tide. And as the saying goes,

“There is no business to be done on a dead planet.”

In recent months, calls for a Green Recovery have heightened, begging the question of whether businesses will take this opportunity to transform in line with planetary and social needs, or whether they will largely continue as “business as usual”.

The climate crisis brings a host of risks, like those outlined above, requiring a new kind of leadership; one where leaders step up to the challenge and begin to strategically place the interests of the planet and its inhabitants above quarterly sales and short-term shareholder value — not just “to do the right thing”, but because it makes business sense.

Let’s hope that the tragic circumstances brought about by COVID-19 can encourage this new kind of leadership, and help us to address the challenges of both today and tomorrow.