The top 4 climate change priorities risk managers need to tackle
Climate change has the potential to dwarf any fallout we have seen from COVID-19. Like the pandemic, no individual or company is immune. Unlike the pandemic, there is no vaccine offering light at the end of the tunnel. This is not a transient risk. It requires coordinated action and preparation now.
By mid-century, the world could lose more than 18% of current GDP if nothing is done to mitigate climate change, according to Swiss Re Institute research on the economics of climate change. China’s economy would shrink by a quarter; the US and Eurozone by around 10%.
Some of the worst-affected countries will be those Asian nations we are looking to for future economic growth. And along with Latin America, the Middle East and Africa, they have among the lowest capacity to adapt to these changes, the study says.
Here are four key areas of risk associated with climate change that businesses must consider:
1. Physical risk
The report makes it clear: no country will be left untouched. We are already seeing the physical fallout of higher temperatures caused by climate change, with more frequent and extreme weather events and natural catastrophes.
With increasing urbanisation and development in high-risk areas, such as along coastlines and flood plains, there is more property in harm’s way. This rising risk requires businesses to work increasingly closely with their insurers. Some risk can be offset. But more focus needs to be given to resilient infrastructure that is able to withstand the physical drubbing that it could face.
Linked to the physical risks, there will also be a transition risk. For example, major policy changes often follow large disasters. We saw this in the wake of the Fukushima nuclear power plant accident in 2011.
And there will also be an increased liability risk, as companies face more demanding ‘duty of care’ assessments. What additional steps must companies take to keep their employees safe? And what are their responsibilities in the wake of a disaster?
Our CatNet tool – which allows companies to break down the effects of climate change in different geographies – is a good example of this.
2. Transition risk
Avoiding the worst of climate change requires a huge effort from all parties to cut greenhouse gas emissions. And with more regulations and enforcement coming down the line this is something every company will have to face up to.
Carbon and industry-specific taxes will hit some sectors harder than others. Likewise, transitioning to less carbon-intensive production measures and climate resilient technologies and products will be easier for some. These changes take time and avoiding the additional business costs means taking action now.
Carbon-intensive industries, for obvious reasons, face a particular challenge. And we have already seen how hard it can be in sectors such as agriculture, where jobs and livelihoods have been severely impacted by greening initiatives in some countries.
At Swiss Re, we are already offering solutions that protect customers’ sustainability opportunities. We are supporting the transition to a low-carbon future by de-risking the investments our customers make into Renewable Energy. As sustainable energy projects increase in scale and complexity, so do the associated risks.
An example of this is the Solar Revenue Put, an insurance solution which can guarantee up to 95% of a solar farm’s expected output.
3. Supply chain risk
We have already witnessed what major supply chain disruption looks like in 2020. Businesses need to be prepared for disruption to happen in more places, more of the time. And business continuity plans need to take into account this heightened risk.
Agile businesses will be able to navigate around disruption in supply chains and stay on top of changes in suppliers. This requires leveraging internal data and pooling it with other information from a wide range of sources to get a clearer and evolving picture.
This also means that supply chain transparency is increasingly important, and it will be central to companies being able to respond in an agile way.
4. Liability risk
Increasingly, companies’ attitudes to and actions around ESG issues are being viewed as a liability. Mounting public and investor scrutiny is putting pressure on organisations to take account of their environmental and social footprint.
Added to this, underwriters will be paying increasing attention to ESG risks. This means businesses need to make greater use of technology and data collection to understand their exposure and impact. With this, they can start to make changes and limit their exposure.
Using data to tackle the risks
Data – from both internal and external sources – is going to become increasingly important as the impact of climate change starts to be felt across all business functions. Grappling with such a widespread risk, and fully grasping its potential impact in an evolving landscape, requires a granular understanding of your business.
Using this information, companies can help mitigate the risk and upskill employees to ensure they are fully across the impact on all parts of the business. Working with insurers and risk partners will help transfer any residual risk.
Everyone will be impacted by global warming – but preparation now is key to limiting the cost further down the line and ensuring your business continues to thrive.
Download Swiss Re Institute's Economics of Climate Change report and find out more about how climate risks will impact industries and countries representing 90% of the world economy.