Climate change, along with its impact on weather-related hazards, creates a unique set of interrelated risks and challenges for companies and their managers. It presents threats to various aspects of a business, ranging from immediate concerns, such as disruptions to operations, damage to physical assets and employee well-being, to more indirect impacts on supply chains and market viability. Grasping the magnitude and characteristics of these risks is essential, and strategies to manage them must be thoroughly and proactively incorporated into business decisions from the outset. So, what are the appropriate next steps? How can companies brace themselves against the ramifications of climate change and extreme weather conditions? Let’s explore ways to comprehend the risks involved more effectively and identify proactive measures to minimize these risks for your business and its stakeholders.
Climate risk management is good for business and the planet.
Climate hazard modeling is a sophisticated approach
that’s employed to assess and understand the potential risks that climate-related hazards pose to assets over extended time frames. This method differs significantly from traditional weather-related risk modeling in its temporal and contextual focus. Weather-related risk modeling typically involves real-time observations of
weather variables using meteorological data, satellite imagery
and computational models. Weather risk deals with short-term weather events and their immediate impacts; forward-looking climate hazard modeling takes a comprehensive, long-term perspective. It integrates historical climate data, climate change projections, hazard-specific models, and location-specific geographical and contextual input to predict the likelihood and severity of climate-related events, such as hurricanes, floods and heatwaves, decades into the future.
This exposure data can then be translated to meaningful data by using use-case-specific impact and loss functions. By considering factors, such as changing weather patterns, rising sea levels and increasing temperatures, this modeling approach enables stakeholders, including businesses, governments and insurers,
to make informed decisions about risk mitigation, long-range planning and resilience-building measures tailored to the evolving climate landscape. It empowers us to proactively address the complex challenges arising from a changing climate and its potential impacts on critical assets and infrastructure.
Acute climate hazards
Acute climate hazards refer to those that are event-driven, including increased severity of extreme weather events, such as cyclones, hurricanes, heat or cold waves, or floods.
Chronic climate hazards
Chronic climate hazards refer to longer-term shifts in climate patterns (e.g., sustained higher temperatures, sea level rise, changing precipitation patterns) that may cause sea level rise or chronic heat waves.
Climate hazards can impact organizations in a number of critical ways.
Unusual weather events can disrupt regular operations at facilities, resulting in losses due to reduced productivity, supply chain interruptions and delayed sales. For instance, Hurricane Harvey inundated the Texas coast, causing a temporary shutdown of nearly all the state’s refining capacity, affecting up to 4.4 million barrels of oil per day.1
Climate events can inflict damage or hinder critical infrastructure, leading to financial losses associated with repairs, replacements, increased insurance premiums and operational disruptions that may, in turn, result in downstream liabilities. An example of this situation is seen in Colorado, where a high risk for wildfires has contributed to homeowners’ premiums increasing almost 52% in 3 years.
Extreme events and chronic climate risks, such as droughts and extreme temperatures, can result in environmental displacement, impacting both productivity and shifts in market demand.
Climate-related factors not only influence the demand, supply and pricing of critical inputs but can also cause disruptions in logistical infrastructure, leading to production delays. For instance, during the Great Texas Freeze, railway closures severed vital supply chain connections between Texas and the Pacific Northwest for 3 days.
Both acute and chronic physical hazards can lead to variations in the cost and availability of the energy utility infrastructure, affecting operational efficiency and necessitating alternative energy-generation solutions. For instance, a drought in Sichuan, China halted hydropower generation, resulting in a week-long shutdown for companies such as Intel and Apple.
Climate change can have health implications that impact employee well-being and safety, potentially increasing liabilities for companies. For example, rising temperatures and extreme heat events can pose health risks to outdoor workers, leading to increased healthcare costs and potential legal liabilities for employers.
How to adapt to climate hazards and mitigate climate risks
There are number of steps organizations can take to adequately prepare for the impacts of climate change.
Model and predict the potential effects of changing severities and impacts of weather events due to climate change. Locate, predict, prepare for and monitor the impact of an array of extreme weather perils that include intense storms, wildfires, flooding, extreme temperature, droughts, air pollution and others.
Understand risks based on various future climate and transition scenarios, and how they could impact the short-term and long-term strategic objectives of the company.
Use this intelligence to make the right decisions to build resilience and adaptation at the right time to minimize risk to the organization and its resources from the increasingly frequent impact of severe weather due to climate change.
Organizations need to understand their options for mitigating climate risk to their assets and assess the potential return on investment (ROI) on such actions.
It’s important to remain compliant for various local and international environmental, social and governance (ESG) reporting disclosures and regulations such as the Task Force on Climate-related Financial Disclosures (TCFD).
These points may appear straightforward to list but implementing them poses
a considerable challenge. Why? To fully grasp these risks, one must gather, amalgamate and scrutinize extensive data sets, including climate change and
global weather hazard models, along with a plethora of geospatial data from
Earth-monitoring satellites to mention a few. Additionally, data pertaining to
an organization’s assets, facilities, infrastructure and supply chain needs to be incorporated into the mix.
Furthermore, every industry and company operates with a unique and intricate
set of impact and loss functions that can’t be satisfied by standard data providers. Addressing these functions demands the adoption of new data science capabilities informed by the latest scientific research. Consequently, we’re faced with vast,
ever-evolving data volumes that require simplification, management, integration
and analysis. Such data complexities make it challenging to mobilize and
understand the data promptly, hampering the effectiveness of data-driven
decision-making processes.
Organizations that are equipped to make data-driven decisions, can more effectively and proactively adapt to severe weather events that can adversely impact their operations. Tools that combine AI with weather, climate, and industry-specific geospatial data are particularly helpful in empowering organizations with near real-time data and insights. When developing your climate risk adaptation strategy and plan, look for solutions that help your organization:
- Gain insights on the short-term, medium-term and long-term risks of climate
change based on various future carbon transition scenarios. Get a deeper
understanding of the methodology behind the models and where your company
and the industry have exposure to climate hazard-related risks.
- Get use-case-specific estimations for value at risk and loss metrics for
immediate and second and third order impact functions. Enable you to build new data science models for how climate-related risks could jeopardize operations
that are specific to your company and industry.
- Bring attention to these risks with dashboarding and analysis capabilities
designed to enhance stakeholder engagement. Understand the portfolio-level effects on your strategic objectives and perform a deep dive into asset-level
analysis. Help ensure business continuity by prioritizing mitigation efforts on
high-risk assets to improve operations and insurance costs.
- Improve real-time decision-making to reduce costs, improve efficiency and
contribute to sustainability goals. Integrate data across platforms and software to make the information actionable.
- Ease investor and stakeholder concerns by providing reporting features that provide all the information required for ESG reporting purposes.
Organizations today not only need to understand the risks climate hazards pose, but should leverage technology to predict and contextualize the specific risks of climate perils to their assets and business operations. By harnessing predictive analytics and geospatial modeling, it’s possible to create a robust climate risk adaptation plan and minimize organizational disruptions and destruction.
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An AI-powered SaaS solution that provides timely and fact-based actionable intelligence to proactively manage the impact of climate-change events.
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Footnotes
1 A short history of U.S. oil refining losses due to hurricanes, Reuters, 30 June 2022.