There is no denying that we are feeling the effects of climate change but have you assessed the risks to your operations and are you making the adaptation measures required?

Climate change is already leading to devastating events across the world, including flooding in England, wildfires in Portugal, droughts in America and tropical cyclones over the South China Sea.

The Paris agreement in 2015 saw nearly 200 of the world’s governments commit to preventing dangerous climate change by limiting global warming to 1.5C over pre-industrial levels (1850-1900). However, the first global stocktake at COP28 last year acknowledged that even if all current climate action plans are implemented, we are on track for a 2.1-2.8C increase. In the face of this reality, assessing the risk of climate change to your business and taking adaptation measures is increasingly important.

How is climate change affecting businesses

As with all risks, climate risks should be assessed regularly alongside mitigation activity, especially given new developments occurring in the market on an almost daily basis.

The NGFS (Network for Greening the Financial System) scenarios explore a range of plausible outcomes to help businesses in the financial sector understand how climate change and climate policy and technology trends could evolve in different futures.

The risks faced by businesses break down into three main categories; physical risks, transition risks and liability risks.

Physical Risks

Assessing physical climate risk is the natural starting point. The physical effects of climate change are already impacting businesses across the world, with increasingly frequent devastating climate events.

When considering the physical risks for your Firm you should look at all areas of the business, including:

• Facilities and other assets;
• Operations;
• Place of living of employees and customers;
• Supply chain.

The physical impacts of climate change can cause damage to people, property and critical infrastructure, including your supply chain. They can also lead to business disruption and price increases.

It is important to change your insurance coverage to ensure your business locations, assets and routes are adequately protected. Insurance premiums are already rising for some businesses due to growing climate risks and this trend will continue.

Transition Risks

As the world adapts to warmer temperatures and we transition towards Net Zero emissions, there are a lot of changes taking place in the market. As a result, businesses face additional risks and costs.

One example is increasing levels of regulation. For example, EU CSRD (Corporate Sustainability Reporting Directive) aims to improve the quality and consistency of sustainability reporting and requires annual verification by a statutory auditor or accredited audit firm. So, businesses are having to either recruit teams with the relevant skills or work with external parties to meet the requirements.

There are also the risks created by the transition to net zero, with businesses facing the costs of adaptation. For some companies, the journey will save them money but for others this will be an additional cost. Some sustainability projects may involve upfront investment which will be offset by operational cost savings overtime, others, such as installing LED lighting, can save you money from day one of implementation.

As a result of climate change, organisations will also be impacted by scarcity and increased cost of resources, for example water scarcity. Between two and three billion people worldwide are already experiencing water shortages and this will worsen in the coming decades, especially in cities.

Reputational risk is one of the most significant risks for Financial Services as society changes its view on ethical business practices. There is an expectation that businesses will move away from activities that contribute to climate change. Assets which are not aligned to this transition will therefore deteriorate in value. Customers, employees, partners and others will increasingly scrutinise your company’s sustainability performance. Companies that act early and make tangible efforts will benefit reputationally while businesses which do not take action risk struggling to attract and retain customers and staff.

Liability Risks

Climate litigation is increasing worldwide as regulators, consumers and investors strive to ensure businesses provide necessary disclosures and comply with the evolving regulatory landscape. Companies that pollute are now more exposed to potential litigation, as are the organisations that fund them. There are also potential liability risks to organisations for emitting greenhouse gases, for example carbon taxes payable under CBAM.

Adaptation

Adaptation to climate change is not at the levels needed. As a result, the world is experiencing increased losses from extreme climate events. Adaptation efforts should be scaled up significantly, be well-coordinated and be comprehensively covered within business plans, policies and budgets.

However, as the world gets warmer, the adaptation options available to us now will become less feasible and effective so taking action to limit warming below 1.5C, as set out in the Paris Agreement, is important. Decarbonisation measures, such as transitioning to renewable energy, public transport subsidies, EV charging points and energy efficiency measures, for example motion sensors and LED lighting, needs to be considered alongside adaptation.

Adaptation measures include protecting people and assets, building resilience, reducing exposure, and ensuring that appropriate financing and insurance are in place.

When thinking about your company premises, there are multiple elements to consider:

• On-site energy generation, such as microgrids to increase building resiliency

• Building resilience to heatwaves, particularly as the ‘urban heat island effect’ makes cities warmer than the surrounding rural area. Green roofs and reflective surfaces which can reduce temperatures in and around the building can be considered.

• Building resilience to drought. Rainwater harvesting systems that capture water on the roofs of buildings are commonly used to store water for use during drought and to reduce flood risk during heavy rains.

• Building resilience to flooding. Planting trees or other vegetation around buildings enables the roots of the plants to allow water to penetrate the soil, reducing the risk of flooding. For areas impacted by coastal flooding and sea-level rise, building at an elevated level can also be considered.

• Building resilience to cyclones and strong winds by considering optimum aerodynamic orientation and ensuring strong connections between foundations and the roof can help. Roofs with multiple slopes and the installation of central shafts which reduce wind force and pressure to the roof by sucking in air from outside can also be considered.

Contingency plans to deal with extreme weather events should be put in place to build resilience in your operations. If your suppliers are located far away or in risk-prone areas, you may want to consider stocking more goods to protect against interruptions. It is prudent to consider diversifying supply chains, including exploring local alternatives and geographic diversity.

Given the pressing need for greater and more accessible financial support to fund the transition and adaptation measures, financial services have a critical role to play in adaptation across the business community.

Accelerating climate action includes tripling renewable energy and doubling energy efficiency by 2030, moving away from fossil fuels, and promoting practices such as low-emission technologies, sustainable behaviours and nature-based actions.

The effects of climate change are being felt by businesses across the world. Taking steps to reduce your impact on the planet is vital. It is also an area many people are passionate about and therefore a great opportunity for employee engagement. Bring together a team of people from across your business to lead the way on Sustainability.

Communicate what you are doing to customers, suppliers and other stakeholders. By doing this you will not only make your business more resilient to climate change, but you will win more business, attract and retain talent and lower operational costs.

firms which act now will be the winners of the future as effective and credible climate action becomes an essential requirement for every business.

If you would like to learn more about climate action for organisations, please contact .