Climate change risk assessment

Clare Taylor discusses the importance of understanding the climate risks in your business. Doing so means you can take protective action, improve your business resilience and reassure customers of continuity of supply.

As the third UK Climate Change Risk Assessment report was published in January, it seems timely to look at it, along with the UK Climate Risk Technical Report and the UK Climate Risk Business Briefing.

A particular reason for doing this is one of the main findings: that small and medium sized businesses (SMEs) are less likely to have business continuity plans of any kind, and they lack the information and support needed to help prepare for risks from climate change. Many are unaware of the need for adaptation. In the UK, smaller businesses appear to be relying on insurance to cover them in case of extreme weather, whereas it may not.

Although the analysis focuses on the UK, the risks apply more widely and are relevant to many locations. The Business Continuity Institute (BCI), an organisation with members in more than 120 countries, reported that in 2020 extreme weather was still a major cause of disruption to businesses despite being overshadowed by the impact the Covid pandemic was having as it built up around the world.

The main risks to businesses

Climate risks are regularly reassessed. Scientific knowledge and understanding of climate change and its impacts is growing, and the speed of change is increasing as more time goes by without enough action being taken to prevent greenhouse gases building up. The assessments also look at how society will be affected and what governments need to do, but the focus here is on business.

Flooding

In many areas the risk of flooding is expected to keep growing. Several factors are involved: prolonged, heavy rainfall or severe storms will increase, overloading surface water drainage systems and the ability of open land to absorb the water; rivers will become more likely to break their banks and coastal erosion and sea level rise are further risks. If you check the flood risk for your location, you can then take measures appropriate to your business.

The risks to your business from flooding apply beyond your own location, so it’s important to check not just the flood risk for your site, but also to look at transport infrastructure and links to where your staff live, how deliveries of goods needed for production might be affected, deliveries out to customers and what measures your suppliers have in place.

Other risks related to flooding are those from infrastructure: flooding of power supply and water and sewage works.

Preparedness can include physical measures to protect your building, contingency plans for remote working, arrangements for temporary relocation, and plans for alternative distribution routes and supply chain disruption. Checking that your insurance offers the protection you need is also important.

Heatwaves

The report also reviews risks from the increased occurrence and duration of heatwaves; there is much that can be done to prepare for these as well.

Risks to productivity include equipment, some of which may not operate well at higher temperatures, as well as people and how they will be affected. If it’s possible to reduce working temperatures by improving insulation and shading or temporarily changing shift patterns, this will save the financial and environmental costs of increased reliance on air conditioning.

Hotter drier summers, where these are predicted, can lead to subsidence in clay soils: if that is the geology in your location, then keep a watch for signs of it and check your insurance policy documents.

Water scarcity

Linked to such weather is a risk to water supplies. Taking steps to reduce your water consumption is something that can offer financial savings, so worth doing regardless. Depending on where you are, your business continuity plans may need to include what to do in case of temporary water restrictions.

In the supply chain, some of the water-intensive industries are already exploring what they can do: for example, reducing how much water is needed in textile dyeing.

Financial risks

The report also highlights financial risks, not just the direct consequences of being affected by extreme weather, but more generally. Insurance costs are expected to rise and insurance to even become unavailable in some cases; having good adaptation plans makes a business less of a risk to insurers so can help with this. Access to capital may also be reduced: if a business applying for a loan is not taking sufficient action to adapt to the changing climate, the lender may consider the risk too high.

Other financial risks are increased costs caused by disruption to infrastructure or supply chains: after Hurricane Harvey in the US in 2017, fuel prices increased across the country.

Supply chain disruption

Increases in severe weather, flooding and infrastructure problems are expected to continue causing disruptions to supply chains.

The Third UK Climate Change Risk Assessment Technical Report quotes a number of research studies carried out by BCI, McKinsey and World Economic Forum.  Previously, it seems that many businesses had not been taking enough account of supply chain resilience in their procurement processes to be able to respond to disruptions. However, the report notes that Covid “highlighted the vulnerability of extended global supply chains, built on lean manufacturing principles in general”, so this is likely to change: when the report was written there had not yet been a full analysis. For the next Climate Change Risk Assessment, recommendations include looking at the learning from Covid.

Although the risk assessment makes gloomy reading, it’s important to see it from the point of view of what we can do about it. As well as working to reduce climate change, there’s a lot that can be done to manage the risks. We also need to watch out for new regulations to manage climate change as these will have their own effects on business.
The main message from the report is: ‘Be prepared.”