Today’s article is all about climate risks. Risk management usually analyses financial key performance indicators, geopolitics, and other factors which may affect any company’s future. Climate risks are not common, but we should start paying attention to them. Not many organizations take climate risks into account while building a company’s business strategy, but at the same time, potential financial loss is highly underestimated.
For those, who have been in risk management for a while already, the list of climate risks will not come as something new, but I am sure there are different angles for evaluation from a climate perspective. There are six main types:
- Physical risk
- Social risk
- Legislative risk
- Technological risk
- Market risk
- Reputation risk
These risks may affect any company that isn’t taking any preventive measures. Also, worth mentioning that all risks may affect your business or industry directly and indirectly through your suppliers and clients.
Physical risk – many different areas can be included in this subtopic:
- Extreme temperature changes
- Floods, fires, drought
- Melting permafrost
- Destruction of infrastructure (buildings, oil, and gas wires)
- Soil degradation, the low survival rate of plant crops
If you live in Europe, you know what I’m talking about. According to the annual report published by the Copernicus Climate Change Service (C3S), the temperature in Europe in 2021 was 1 degree Celsius above the 1991-2020 average. The summer of 2021 was the hottest summer Europe has experienced on record. The year 2020 was also the hottest on record for Europe overall. The flooding, caused by unprecedented rainfall, hit parts of Germany, Belgium, and the Netherlands in July 2021.
For example, out of Europe, temperatures at the Greenland summit in August 2021 rose above freezing for the third time in less than a decade, causing rain to fall there for the first time on record.
We are still setting new records in mid-2022. Throughout April 2022, large parts of Europe experienced below-normal temperature trends. However, early in May, weather patterns have rearranged, and maximum daily temperatures relative to average were among some of the highest in the world at that time. Most of Spain and France had anomalies over 10’C above normal, hitting mid-30’C.
Norilsk Nickel, the world’s leading nickel and palladium plant, is responsible for the spill of more than 21,000 tonnes of diesel poured into rivers and lakes in Russia’s Arctic north in May 2020. Investigators believe the storage tank near Norilsk sank because melting permafrost weakened its supports. The Arctic had seen weeks of hot weather before the disaster.
Social risk – it is widely agreed that social risks depend on physical risks, which we have covered above. Climate-caused migration between countries or regions is usually caused by floods, wildfires, bad ecological situations, extreme weather, and rising sea levels. Climate change is increasingly forcing people to flee their homes for safety and new means to provide for their families. Catastrophic floods in Europe in the summer of 2021 caused people to leave their homes; for example, 10,000 people were evacuated in a tiny town of Venlo in the Netherlands. Devastating floods in Australia in spring 2022 also forced people out of their homes.
The concept of “Climate Refugee” doesn’t entirely exist in international refugee law, so that is the reason why there aren’t precise estimates on how many people are forced out of their homes due to climate change. According to a joint study by non-profits ActionAid International and Climate Action Network South Asia, there were 18 million climate refugees in South Asia at the end of 2020. The authors estimate that under the current emissions trajectory, by 2050, over 62 million people in South Asia could be forced out of their homes by disasters made more frequent and more severe by climate change.
The World Bank scientists predict there will be 40.5 million internal climate migrants in South Asia by 2050. Almost half of these people will be in Bangladesh. Across East Asia and the Pacific, there may be 48.4 million internal climate migrants and 5.1 million in Eastern Europe and Central Asia.
People are forced out of their homes, and, consequently, organizations are losing employees. The outflow of people brings a loss of labor in a region. Women are affected far worse than men by climate change impacts. Due to poverty and environmental injustice, they are usually left behind to take care of household chores and agricultural activities, look after children and the elderly and manage livestock. Women who migrate to urban settlements are often forced to work in precarious settings where workers’ rights violations are rife.
Legislative risk – potentially brings the heaviest financial losses.
- Carbon quotas
- Penalty for pollution
- Landfill closure
- Substance toxicity regulation
- Ban on certain materials
- Water consumption tax
- Disclosure requirements
- Mandatory management of non-hazardous waste
Early in June 2022, New York’s state Senate passed a bill to ban new permits across the state for bitcoin mining facilities that use carbon-based power. Supporters say there’s a need to pause and review the environmental impacts of the energy-intensive process. China cracked down on bitcoin mining last year, and many companies moved to the US, which now accounts for 38% of the world’s miners, up from 16.8% in April 2021. New York has plentiful hydroelectric power and numerous vacant industrial facilities and has been a popular destination. But miners are increasingly decamping to more crypto-friendly states, like Georgia and Texas, as New York bears down. NY lawmakers are worried that revving up dormant fossil fuel plants could put the state off track to meeting its target of reducing greenhouse gas emissions by 85% by 2050. This is a recent example of how the law impacts all industry players.
Giant corporations and the most significant manufacturing industries are already subject to government regulation. It would make sense to follow these regulative requirements because it is likely that these laws will be extrapolated to other markets and industries soon.
Technological risk – the whole manufacturing process in one industry can become outdated or not needed anymore, even though it is in an excellent working condition. It is crucial to keep your operations up-to-date with the market trends because technologies develop rapidly. What does company Kodak do now? When I was a child, and we were going to visit my grandparents for a two-week vacation, we only had 36 photos to make with limited films. I have more than 15K photos in my phone gallery only now. Electronic toothbrushes, cigarettes, electric cars, digital wallets, and smart watches measure your heartbeat. Many usual and routine things were not even imaginable 20 years ago.
The European Union will require all new smartphones and tablets sold within its borders to have a standard charging port by the fall of 2024 and laptops by 2026. A new provisional agreement was issued, pushing technology giants such as Apple to fall in line with other smartphone makers that have widely adopted a universal port in recent years. This is an excellent example of how lawmakers bring changes to technologies and impact all market players.
Market risk – consumer behavior can change, and demand can naturally decrease. Companies should evaluate how competitive they are in a market, what consumers’ central values are, and whether a company can share and supply these values. Would a company avoid greenwashing in its marketing communication in a run for its market share? New types of competitors arise now across different sectors. For example, sharing economy is becoming more and more popular. Revenue in the car-sharing segment is projected to reach US$12.95bn in 2022 with an expected annual growth rate 2022-2026 of 6.28%, resulting in a projected market volume of US$16.52bn by 2026. The number of users will likely amount to 60.7m by 2026.
- Changes in consumer needs
- New business models
- New products as a replacement for the old ones
- New terms from consumers
Reputation risks – companies build their reputation for an extended period, but once the damage is done to reputation, it is almost always hard to rebuild. Even if some incidents looked harmless from a business perspective because consumers will stick, some employees and investors wouldn’t like to be related to a bad reputation.
- Damage to brand value
- Loss of customers and profit
- Shortage of employees
- Attractiveness for employees and investors
- Reviews in media
BP, the British Petroleum energy company, launched the rebranding to Beyond Petroleum in mid-2000. The project’s goal was to position the company as an environmentally sensitive company looking for sustainable, green energy sources. However, then happened the catastrophe in 2010. The Gulf of Mexico oil spill is considered one of the worst corporate disasters in recent history. British Petroleum operated for more than 100 years, and its reputation was severely damaged over just a few days in 2010. Oil spewed unabated for 85 days until the company regained control over the leak by placing a fitted cap over the gushing geyser. Environmental impacts were dramatic and very severe. The company faced numerous lawsuits across the Gulf region from businesses, individuals and investors. Many around the world were disappointed with the once-proud London-based energy company.
In conclusion, I would like to mention another thing. Of course, all the risks discussed above have different material and economic effects. For instance, the physical threat of extreme heat waves would result in non-stop working air conditioning on the company’s premises. That would lead to increased electricity consumption (higher utility bills) and decreased productivity of employees (missed deadlines, human mistakes). On the other hand, switching to renewable energy and new carbon prices would lead to reduced demand for oil and coal. The estimated loss across the industry would be 900 billion USD.