The global operational risk picture country by country.
Brace for the cutting edge of climate change | RiskMap 2022
TOP RISKS: OPERATIONAL
Brace for the cutting edge of climate changeDiego Andreu | Principal & Amit Narayan | Partner
Climate change and its associated impacts are the number one operational risk to business in 2022. While COVID-19 continues to pressure business operations globally, extreme weather events and natural disasters will take centre stage by disproportionally influencing politics, economic policy, urbanisation, infrastructure and capital investments - to say nothing of the compounding impacts on business continuity, global supply chains and duty of care considerations.
A September 2021 report by the UN’s World Meteorological Organisation stated that extreme weather events are not just happening more, they’re also happening increasingly simultaneously. The report further stated that climate change has helped drive a fivefold increase in the number of weather-related disasters in the last 50 years. This squarely brings back into focus the urgent need for businesses around the world to be prepared for multiple “crisis within a crisis” scenarios.
The business world has rarely seen such an exponential increase in operational risk, one perhaps matched only by the rapid rise of cyber risk. As a result, business is playing catch up, developing spot fix strategies that are not sufficient to mitigate the escalating risk.
Band-aid style strategies that address climate-related risks by individual asset or event miss the aggregate risk and its compounding effect on business. They also ignore the complexity and scale of climate risk, which includes an almost unlimited number of stakeholders and intense scrutiny on how businesses manage (or fail to manage) the risk. A fundamental reset is required. Businesses now, unequivocally, need to define clear business continuity and climate change mitigation programmes, as well as align more closely to the disaster management programmes established by local and national governments.
It's worse than you think
Stifling heatwaves, huge floods, and catastrophic droughts and wildfires, along with an increase in the intensity and size of tropical cyclones are becoming more common; as are their damaging impacts for business and the communities they operate in. The Intergovernmental Panel on Climate Change (IPCC) warns that this trend will continue as “every region is projected to increasingly experience concurrent and multiple changes in climatic impact-drivers".
From a financial perspective, the situation is equally serious and the impact on business is clear. A 2021 report by Disclosure Insight Action shows that global supply chain organisations expect a financial impact of almost USD 1.3trillion over the next five years – equal to the GDP of Australia or Spain.
By the end of the third quarter in 2021, the US had already clocked USD 1bn in weather-related costs, surpassing 2020’s total (National Climate Report - September 2021 / NOAA). Of the 11 years recorded where storms have caused more than USD 1bn worth of damage in the US, ten have occurred since 2008. Across the Atlantic, the European Central Bank has warned that no action on climate change could reduce European GDP by 10% by the end of the century and cause a rapid rise of wildfires that could exponentially increase physical risks across the continent. Meanwhile in Asia, the IMF estimates that extreme weather events have caused annual infrastructure damage of more than USD 50bn between 2010 and 2019.
With such dire projections across both geographies and sectors, many companies realise that it is now impossible for them to make decisions based on relative climate stability. Globally, businesses must re-orient their planning and execution strategies for a world with a changing climate and unpredictable weather patterns. The financial, reputational, and accompanying life-safety repercussions are too large to ignore.
Governments and businesses go up a gear
Globally, businesses are beginning to mobilise. Control Risks’ upcoming 2021 Global Risks Survey shows that more than 60% of our clients agree that “climate related hazards and disasters are a critical risk”, and that they are “bringing in mitigation measures” in the coming years. This is part of a growing trend where companies are becoming increasingly aware of their exposure to climate change related risks, and are seeking tools, strategies, and expertise to manage and mitigate against it. There are also clear signs that companies are following through on a change in mindset (brought on by greater board and investor scrutiny) to create new operating models and develop tools and processes to integrate climate risk into decision making – but businesses need to move faster.
It is not only government-imposed regulations and sustainable investing that are a major consideration when looking ahead. Customers and employees expect businesses to be climate conscious and to take appropriate steps to increase sustainability and reduce carbon emissions. As a result, climate change should be at the centre of boardroom conversations.
From a more operational perspective, companies are prioritising natural hazard assessments as an integral part of their threat and risk assessments. Many are revisiting due diligence and risk assessments, whether on facilities, campuses or mine locations, to account for changes in climate or weather-related vulnerabilities. They are also looking to understand governments’ capacity and intent to manage the problem at an increasingly granular level, and to understand where the gaps and points of vulnerability in this response are likely to be.
One minute to go: the imperative for businesses
Businesses that choose to refocus their operational risk management strategies can leverage comprehensive methodologies to adapt to the new reality. The well-established 3Rs principles – readiness, response and recovery – which Control Risks has been field testing for years to support our clients, can be used as framework model.
From a readiness perspective, companies should start by taking a look at their operational footprint as mapped against climate-related exposures. Within that exercise, businesses need to consider multi-layered climate risk factors in their asset-level risk assessments – including the identification of critical dependencies – before re-evaluating mitigations and controls with this new context in mind. Technology platforms with geospatial mapping capabilities like CORE + Hyperion can help ground these assessments using real data based on trends, and then monitor for them on a continuous basis. They can also leverage predictive capabilities to more accurately forecast the potential severity of impacts based on underlying pattern recognition models. These help understand how past events have played out and what factors were involved, before triggering early warnings to help companies get ahead of climate-related events and improve response decisions and actions.
Companies will need to take into deeper consideration questions around how far to extend duty of care to employees directly impacted by extreme weather events. They will also need to develop and maintain a more detailed understanding of national and local-level infrastructure and resources available to them for assistance during a disaster. This should include public and private assistance capability (medical, security, search and rescue), and availability of critical resources with a potentially disrupted supply chain. Businesses should also consider alternative strategies to plan for redundancy and phased relocation of physical assets to lower-risk areas in the longer term.
Response to disaster management in 2022 and the years ahead by cash-strapped governments will be affected by the protracted uncertainty created by the pandemic, as well as the need to devise new means of mobilising revenues and delivering rescue and rehabilitation efforts. In this context, resilience-tested companies will need to build agile and adaptable supply chains. Updating and testing of traditional business continuity plans will no longer suffice. Modular programmes which can be broadly socialised, tested and verified among employees across locations and business units must be instituted to allow companies to limit damage and improve recovery time. These plans must be future proofed to ensure that they are scalable and that they account for an increase in climate related operational risk in decades to come. This should include the consideration that plans should not be heavily dependent on government assistance as state resources will likely be prioritised for critical infrastructure and public safety operations.
Lastly, as we have seen time and again when supporting clients in the aftermath of natural disasters, recovery requires a multi-pronged approach. Prioritisation of people should be at the centre of these efforts – starting with the full range of swift and effective measures to support impacted employees and communities. This is critical for businesses to get right from both a reputational perspective, as well as to be able to resume full business operations.
Putting climate at the heart of business
Planning for climate-related risks must therefore now sit at the centre of any effective, long-term risk mitigation strategy for global business. In many cases, business survival will become dependent on it. Some organisations will adapt, use it as a competitive advantage, survive and even thrive. Others will choose to ignore it and suffer the consequences.
Businesses that choose to tackle the challenge head-on need to prioritise and implement refreshed risk management plans to address concrete climate-related risks to their operations. These should be self-sufficient but should consider and integrate, where possible, external resources that might be of help including private sector and government disaster management programmes.
The over-arching reality is that businesses have to be self-reliant in preparing for their climate future. At the end of the day, every successful response and recovery story rests on a strong culture of preparedness that can only be built within the organisation. UNESCO calls it the “real and long-lasting culture of prevention”. Is your organisation ready? Climate risk is here. Every company is at risk. Now is the time to prepare – and act.
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