To limit rising losses from climate-related disasters, more and more businesses worldwide are weighing shifts in supply chains and production methods. At the same time, regulators and standard-setters have begun to pay more attention to companies’ management and disclosure of climate-related risks.
Worldwide losses from extreme weather and climate-related disasters nearly quadrupled from an annual average of $43.4 billion in the 1980s to an annual average of $165 billion in the past decade, German reinsurer Munich Re estimated. Less than one-third of the losses were covered by insurance.
The risks associated with climate change are prevalent and growing across industries.
“Construction and property development are obviously at risk. Those in agriculture and crops are feeling the changes even now, hence the movement towards urban farming,” said Associate Professor Audrey Chia of National University of Singapore Business School who chairs the university’s environmental management programme.
Addressing these risks, however, promises to bolster sustainability by driving performance and building and protecting a business’s brand.
Energy and supplies
“Whether the company is in food and beverages, cosmetics and personal care, or any kind of manufacturing — it may be good to look for substitutes or alternatives to materials,” Chia said. The UN estimates 80% of global trade is linked to supply chains, and it is a key area of exposure for companies everywhere.
Think of semiconductor chips in your smartphone, tablet, or wearable fitness device. When consulting firm McKinsey researched chip supply chains globally, it concluded they are “highly geographically concentrated in regions with an increasing probability of relevant climate hazards”.
Whether they produce medicine, semiconductor chips, or crops, companies understand these risks on some level, with the 2021 World Economic Forum’s Global Risks Perception Survey rating four environmental threats among the five most likely this decade. Extreme weather, climate action failure, and human environmental damage were the top three; biodiversity loss ranked fifth.
Still, there is a gap between awareness and preparation.
“During Hurricane Harvey in 2017, 20 of Houston’s 120 hospitals had to close, interrupting care for many area patients,” said Doran Hole, the CFO of Ameresco, a renewable energy and energy efficiency company. Hole suggests investments in combined technologies for heat and power, solar, battery energy storage, and microgrids could help organisations safeguard mission-critical facilities against similar events with less disruption in the future.
The case of palm oil
Associate Professor Chia suggested companies commit resources and make climate risks part of the C-suite agenda. “Set goals and targets and measure results, not just activities. Commit to measuring sustainability, and report both the environmental impact and costs of the business, as well as its positive impacts,” she said.
This is what Mohamad Reeduan Mustapha, FCMA, CGMA, does as vice-president of group risk management at Terengganu Incorporated Sdn Bhd, an investment company for the Malaysian state government.
One of Terengganu’s investment areas is plantations. Malaysia is one of the world’s largest producers of palm oil. If anything sums up the complexity of economics and the environment, it’s palm oil. Production of palm oil, used in common foods and cosmetic products, has led to widespread deforestation and habitat loss in some of earth’s most biodiverse regions — and at the same time it has fuelled economic growth in less developed economies.
Palm oil production is itself prone to climate change and extreme weather events. “Each year, flooding has caused massive chaos and upheaval on the east coast of Malaysia,” Mustapha said.
It’s against this environment and economic backdrop that Terengganu conducted a risk management analysis of plantations. The resulting study recommended plantations promote and expand climate-resistant varieties, soil and water conservation, forest cultivation, emission reduction technology, and coastal flood protection.
Disclosures and risk management
Not every business looks at climate risks the same way Terengganu does — but it is clear every company should look beyond balance sheets to grasp the nettle of climate change adaptation. Financial and industrial sectors must address shared problems, according to Joe Zou, a finance professor at the University of Hong Kong.
“The first problem is losses arising from climate-change engendered hazards, such as floods, storms, typhoons, and landslides,” he said. “The second is compliance and corporate social responsibility disclosure — for example, related to carbon emission — and transparency, which may give rise to litigation risk and reputation risk,” Zhou said.
Climate-related hazards can cause businesses harm by, for example, forcing plants to shut down or by increasing operational costs due to rising heating/cooling or water treatment costs, according to a review of disclosures by 1,630 companies. Acknowledgments that climate-related risks would likely have an impact on operations increased to 67% in 2016, up from 50% in 2013 and 34% in 2011.
About three-fourth of the companies (76%) took measures to manage the increased risk by, for example, updating disaster response plans or scenario planning. About half of the companies (47%) invested in technology or infrastructure to, for example, increase energy efficiency or mitigate potential flooding. Just 3% of companies implemented sustainability measures such as conservation or restoration of ecosystems.
To better tackle sustainability risks, Deloitte suggests these three basic tactics:
- Promote greater collaboration internally to address risks that are likely to affect the financial condition or operating performance of the business. Break down silos and engage in integrated thinking.
- Determine which environmental, social, or governance risks are material to craft a sustainability reporting strategy.
- Provide useful climate-related financial information to lenders, investors, and insurers.
— Luke O'Neill is a freelance writer based in Australia. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com