While climate change regulation remains a highly debated issue among nations, an increased burden falls to corporations and individual organizations to step up initiatives as a means of reducing carbon footprint and changing future risk trajectory. We recently hosted a risk management club with partners in France — a gathering of experts discussing current and future challenges and opportunities — and climate change was on the agenda. Risk managers in France and around the world recognize climate change as one of the top risks for the next decade. Understanding its history, considering upcoming trends and keeping an eye on continued challenges will lead the way for potential solutions.
Last year's natural disasters gained even more attention from risk managers around the world. In fact, 2021 was one of the costliest catastrophe years in recorded weather history. More than 300 catastrophic events were recorded — costing $111 billion in insured losses. That number takes into account the floods in China, British Columbia and Australia, cyclones in Bangladesh and India, and a typhoon in the Philippines. Three natural disasters alone — Hurricane Ida, Winter Storm Uri and the floods in Europe — generated damages estimated at more than $50 billion.
Today, climate change — specifically, the impact of extreme weather events — is seen as real and undeniable. In 2021, the concentration of carbon dioxide in the atmosphere reached a historically high level: 414.72 particles per million. Increased carbon dioxide leads to higher temperatures and rising temperatures lead to more frequent and intense natural disasters. Based on this trajectory, the global economy could contract by 10% by 2050. Looking ahead, no geographical area will be spared. Countries in Southeast Asia and Latin America will be more exposed to the risk of drought. Northern and Eastern Europe are expected to experience unprecedented episodes of rainfall and flooding.
Accordingly, companies must embrace climate-related risk management principles, and more broadly environmental, social and governance (ESG) strategies, and factor them into planning or face rather extreme consequences, such as liability exposure, brand exposure, loss of customer base, loss of physical assets and business interruption.
Corporations and individual organizations will face continued challenges related to climate risk. These may include:
- Physical risks, impacting damage to property, disruption of supplies, loss of productivity or income
- Risks related to the transition to a low-carbon economy
- Business continuity risks, including business interruption and risks within the supply chain, which could become more widespread and extensive
- Brand and reputational risks tied to public opinion and investors’ perception of ESG compliance
- Risks related to the increase in migratory flows and social and political instability
- Liability risks including litigation challenges, nuclear verdicts, reputational hits tied to corporate policies and more
How can risk managers prepare?
Corporate conversations and action plans to address climate change are evolving. For many companies, ESG principles have become an extension of their culture and value system; shareholders, customers, investors and now regulators are driving them toward change. The security of their brands demands it, and the risks of failure to adapt and adopt are simply too high. But from a specific risk management angle, not all companies are fully prepared and equipped to address climate-related risk. Where can improvements be made?
- Risk managers should revisit their role in the enterprise risk management process — times have changed. Lead the effort to evaluate your company’s risk appetite/tolerance.
- Think beyond insurance. Transferring risk should only be part of your strategy when required or when it’s the most efficient option. Insurance may or may not be available — and certainly at a higher cost.
- Consider areas viable for self-insurance, what risks you can/should take, and which risks you should hedge.
- Rely on your risk map and monitor the weaknesses that emerge by applying the potential impacts of climate change.
- Offer alternatives beyond the traditional, such as a network of captives, trigger-based parametric insurance policies, or catastrophe (CAT) bonds, and vet concepts early on and not just when you’re in a bind.
- Get out of the annual insurance renewal cycle. Instead, think about strategy in terms of where you want to take your program over the next three to five years.
Data and analytics
- Predicting the consequences of different types of climatic events — provided the predictions are based on robust models — will help risk managers prepare for the future.
- Don’t just rely on your insurers and brokers to do the actuarial work, the loss analysis and the loss projections. Develop your own understanding of the analytics and be able to apply them to your strategies.
- Lead your organizational effort on mitigation opportunities and be open to exploring program options.
- As both cost and availability of insurance coverage fluctuate, your analysis of the potential ROI of safety and ergonomics, facility and vehicle cameras, telematics and weather protections may also change.
Ultimately, the risk manager is poised to be more influential than ever — as long as organizations are willing to listen. The challenges of climate change are not going away. Now is the time to step up efforts. Educate your leaders. Don’t be afraid to explore the power of partnership to implement proven programs rather than trying to build them yourself. Build strategic plans around coverage, data and mitigation. Protect your organizations against physical risks, business continuity risks, liability risks and risks to brand reputation or compliance.
We are committed to meeting these challenges head on.
> Learn more — check out an expanded version of this article here.