Managing Climate and Nature Risks in a Changing World

In a world where the pace of nature and biodiversity loss is accelerating at an alarming rate, corporates are finding themselves in a new, dynamic risk landscape. Nowhere is this more evident than in Asia Pacific, which was hit by 99 natural catastrophe events in 2022 alone with economic losses of USD60.9bn, according to the Swiss Re Institute. Understanding where, when, and how to act on climate and nature-related risks and opportunities is now a business imperative and vital competitive edge. 

Make no mistake, climate and nature-related risks are well on the radar of the world’s top leaders and experts. However, the lingering question is: are businesses fully prepared to confront the severity of these mounting risks? PwC's bi-annual Global Crisis and Resilience Survey suggests not. It revealed that business leaders tend to overestimate their organisations' resilience even though they acknowledge its importance. 

Businesses both impact and depend on nature, and their risk management needs to reflect this relationship. Hence, leaders and their organisations have an obligation to investors, customers and employees alike, to ensure that they are taking the right measures today to protect their supply chains and profitability. 

How then can business leaders better manage climate and nature-related risks? We outline a few key steps below. 

1. Identify new and emerging risks with data-driven risk assessment

The first step is to identify specific risk management processes and elements. Such insights will enable corporates to prioritise resources and investments accordingly. Business leaders should assess the following: 

• How diverse risks are identified and prioritised; 
• Time horizons that are used to account for emerging and future risks;
• Assessment criteria, tools as well as methodology being used; and
• Potential value chain implications, such as particular commodities, regions, operations that may be at risk.

The key to addressing these factors is having consistent, high-quality data across various business sites, functions and operations. It is important to have experts on the ground to conduct proper site assessments. Risk parameters may present differently depending on the location and business activities. 

The interconnectedness of climate- and nature-related risks requires businesses to shift to a more dynamic and holistic approach to risk management. For example, nature risks such as drought in crop production may accelerate social risks like job loss.

2. Incorporate climate and nature risks into strategy

After identifying most material impacts and dependencies, businesses need to incorporate these risks into existing risk categories and types, which includes developing and updating climate-risk adaptation plans for informed decision-making.

This requires internal collaboration across different functions in the organisation. From CEOs to CROs, finance to procurement, business leaders have to overcome potential functional biases to foster a culture of collaboration.

Overall, the foundations of effective ESG integration are:

• Adherence to a culture of good governance; 
• A good understanding of the corporate strategy, clear objectives and assessment of ESG-related risks and opportunities that are most relevant;
• Regular revision and prioritising of ESG-related risks and opportunities; and 
• Relevant and robust information gathering to support informed decision-making, as well as clear communication of results and risk, culture and performance reporting.

3. Tap into the opportunity that sustainable finance presents

Managing climate and nature risks is not just about preparing for short-term external hazards; it is also about unlocking capital and investments for a low-carbon and nature-positive economy. This is where the finance ecosystem comes in. 

Businesses and the finance sector are increasingly forging partnerships to mobilise sustainable finance. For example, banks can reduce the cost of capital for businesses investing in solutions to decarbonise their supply chains. Insurance products or green bonds can also enable the necessary large-scale investments required to bring new, clean technologies to market.

By tapping into sustainable finance, corporates can harness the opportunities that arise from transitioning towards a more sustainable future.

The challenges posed by climate and nature-related risks are formidable but not insurmountable. Business leaders that incorporate these ESG considerations into their business models not only position themselves to leverage the opportunities that come with transitioning towards Net Zero and Nature Positive pathways, but also build long-term resilience and competitiveness.

To learn more about identifying and assessing physical climate and nature risks, get in touch with Swiss Re Corporate Solutions. Contact WBCSD to find out more about how to integrate ESG risks into enterprise risk management.