Key takeaways

  • As global temperatures continue increasing, the likelihood of worsening climate disasters also increases. 
  • The potential occurrence of a climate disaster is called climate risk, a type of risk that can increase the probability of other risks happening. 
  • Climate risk can and will affect you and your business, depending largely on your location and supply chain.
  • To prepare for this risk, it is recommended that your insurance plan, business continuity plan, and disaster recovery plan are ready for whatever may come.

Origins of Climate Risk

The global climate has always affected humans. Rain, sunshine, wind, and temperature all make life as we know it possible. Like most animals, we are incredibly vulnerable to droughts, wildfires, and floods. Throughout history, humans have always dealt with disasters; however, these have been infrequent and of relatively low impact. Of course, disastrously extreme weather has happened before, but events of such magnitude rarely occur. 

Thanks to the Industrial Revolution, our dependence on fossil fuels, and developed countries’ unsustainable lifestyles, the world is continuously pumping more greenhouse gases into the atmosphere. This traps more heat in the atmosphere, putting more energy into the global climate system making climate disasters more intense, frequent, and likely to occur. The risk associated with climate change’s increasing likelihood of climate disaster is called climate risk. If you need a refresher on climate change, look at Sustainable Earth’s Sustainable Explainable for more information. 

This type of risk is different from other risks businesses are commonly exposed to, such as strategic, compliance, operational, or reputational risk. Climate risk doesn’t directly affect businesses and communities. Instead, it directly triggers other types of risks that do. For example, a storm that floods your manufacturing plant directly triggers operational risk. Not including climate change in your long-term plans might open you to strategic risk. Climate risk isn’t reinventing the wheel, it’s adding another layer to the pre-existing risks your business already manages. 

Climate risk is also different from other types of risk because it can act systemically. Climate disasters don’t affect just one company or industry; they directly affect multiple sectors within one location. These affected sectors can then create ripple effects that can impact entire supply chains and economic systems. 

It’s important to highlight that climate risk doesn’t only come from extreme weather events such as storms, floods, droughts, and wildfires; there are also slow onset events such as sea-level rise, desertification, ocean acidification, and biodiversity loss. These don’t present as forcefully as extreme weather events, but they still pose a significant threat to society and life as we know it. Because of this, it’s essential to consider the plethora of ways climate change can affect your company in the short and long term.

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Climate disasters in a connected world

One way to think about risk is to imagine our socio-economic systems and institutions as a spiderweb. A shock to the web is felt everywhere, and a strong shock can even wipe out parts of the net. A disaster strong enough could break down the entire web. 

A crucial part of climate risk is that the threat to the system is not contained to a particular geography. While globalization has created an international economy for goods and services that make life as we know it possible, it has also created a highly complex network of economies in the process. Everything is connected. This network is also susceptible to stress. Just think about how Russia’s invasion of Ukraine has skyrocketed gas prices worldwide or how COVID has disabled supply chains worldwide. Climate disasters will work similarly:

  • A catastrophe in Taiwan might affect chip manufacturing plants, affecting most electronics production worldwide.
  • A drought in Southeast Asia could significantly impact the price of rice, increasing food insecurity worldwide.
  • Heatwaves in Germany could impact machinery production, creating rippling effects on the automobile and industrial machinery economies. 

This is why climate change is so scary. It’s unpredictable. Our world is incredibly vulnerable to intensified weather events, and due to the interconnectedness of everything, a disaster on one side of the world can affect everyone on the other. If enough stress is put on our system, it can and will break.

One case study researchers use to look at the systemic effects of climate disasters is droughts in Africa. This diagram illustrates how one event can cause systemic impacts beyond the initial shock:

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Am I at risk? 

So we know what climate risk is and why it isn’t good. We haven’t yet touched on what dimensions of society will be impacted. Researchers selected five impact domains positioned to be most affected by climate risk, and they are: Economy, Society, Homeland Security, Human Health, and Living Conditions. 

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As you can imagine, these categories aren’t mutually exclusive. Hurricane Katrina wasn’t just bad for people’s physical homes. It also ushered in economic hardship, risk to life, infrastructure damages in the billions, and made life in New Orleans semi-apocalyptic for some time. When climate disasters hit, electricity, water, transportation, crop production, and even our homes can be profoundly impacted, affecting our economies and everyday lives. The chances of this happening are increasing as we pump more greenhouse gases into the environment. 

How can I protect myself and my community from climate risk?

Before thinking about specific actions, it’s essential to understand that not every place will experience the same risks. Familiarize yourself with the most likely threats in your area to make the best-informed decisions. The World Bank has compiled a list of resources for anyone to use regarding climate risk. It includes tools and documents for agriculture, coastal flood protection, energy, health, roads, and water. Climate Check is another resource that can tell you some likely risks in your area, such as extreme heat, extreme rainfall, hurricanes, or wildfires. The New York Times has a similar tool.

Are you a farmer? The USDA’s climate solutions page provides recommendations on how you can protect your crops from erosion, drought, and flooding. 

Once you investigate how climate change might expose your house or business, the next step is to get prepared. No need to go full-on doomsday preppers for this. Instead, look at three documents:

These three plans prepare you for the worst-case scenario and ensure your company is resilient to external stress. An insurance plan protects you financially; A business continuity plan is a document detailing what your business is doing to prevent threats and recover from them when they do happen; your disaster recovery plan is part of your business continuity plan and specifies how your business will respond to a disaster. If you don’t have these already, consider making a plan to create them, and be as prepared as possible when a disaster occurs. If you’re a small business looking to develop a sustainability action plan, the SME Climate Hub has resources to ensure you’re doing your best to reduce emissions while also minimizing your exposure to climate change. 

Lastly, once you’ve identified the risks you are exposed to, think about ways you can mitigate these threats. For example, most businesses have a supply chain. Understanding how climate change might affect your supply chain will allow you to make smarter decisions about where you source from or how you source these products. Another example is looking at your energy sources. A disaster might easily disrupt energy distribution to your operations, creating disruptions. Many companies are protecting themselves from this threat by building their own microgrids. Microgrids allow you to produce your own energy, making you self-sufficient and resilient to energy-grid shocks.

You might have recently seen that the SEC came out with a proposal that would require all publicly-traded companies to disclose their climate-related risk. This long-awaited proposal shows how prevalent climate risk is and how potent its effects can have on society. The threat of climate change is so significant that companies are finding liability in their climate exposure. 

Climate change is here, and unless radical change happens, it will continue to worsen. It is important businesses acknowledge the threats extreme weather can induce. Knowing what risks you are exposed to is the first step in managing said risk, and now that you have some resources, you can build out your resilience strategy to minimize your exposure to climate risk.