Mitigating Risk in Climate Change Investment

Since 1880, the average global sea level has risen more than 8 inches, and that change has accelerated in the past decade. Extreme weather also threatens a variety of locations, impacting lifestyles, businesses, and the peace of mind of individuals across the globe.

As increasing numbers of people become concerned with climate risk, renewable energy, and responsible investment, financial markets are evolving. As a result, modern businesses face several risks ranging from damage to physical infrastructure related to climate change to higher tax or regulator costs.

Proactively approaching climate change investment and mitigation efforts can increase businesses’ stability. This article looks at climate risks for businesses, and ways organizations can reduce climate change risks now and in the future.

Climate Risks for Businesses

Climate-related risks can impact business bottom lines, workforces, and reputations. Below are five of the most prevalent climate risks.

Physical Damage to Buildings and Facilities

In 2018 alone, the United States incurred $91 billion in damages from climate- and weather-related events. The historic extremes have continued.

In 2020, 22 unique events resulted in more than a billion dollars in damage each — well above the record of 16 previously reached in 2017. Severe storms spawned tornadic events, tropical cyclones, droughts, and wildfires combined to create $95 billion in damages in 2020.

In 2021, there were 20 unique billion-dollar events, coming in behind only 2020 in number but well outpacing the previous year in damages. The 2021 total for damages was $145 billion.

Extreme weather events and shifting climate frequently lead to:

• Damage to buildings from wind, including lost roofs or walls or even total loss of structures
• Damage from flood and water, including loss of equipment and or structure
• Damage from fire, including loss of structure or partial structures or loss of supplies or equipment

Supply Chain Disruption

Global supply chains are increasingly impacted by climate change, particularly severe weather events. For example, a large hurricane or typhoon hitting a major port city can be enough to disrupt supply chains for months, and experts believe weather events of such scale will become more likely in the future. According to McKinsey, by 2040, the probability of a hurricane event large enough to disrupt chip supply chains could grow by two to four times.

Health and Productivity of Workforce

Even outside of extreme weather events such as hurricanes or tornadoes, climate change can put the health and productivity of workers at risk. Those employed in occupations regularly performed outdoors may contend with severe heat or cold. Workers in indoor situations without air conditioning or heat face similar concerns.

Climate risks can also increase toxic substances or a higher risk of infectious disease, especially in hot environments. Add in the impact of emergency weather situations, requiring dangerous, excessive work from first responders, law enforcement, and medical personnel. As a result, climate change may drive increasing worries for employees.

Higher Regulatory and Tax Costs

As governments latch on to ESG requirements and other potential mitigation factors to subdue carbon footprints, businesses may increasingly find themselves holding the bill for such efforts. Those additional costs could include the expense required to meet more stringent regulatory requirements in various industries and locations as well as additional taxes charged by governments trying to pay for their eco-friendly efforts.

Repricing of Risk Premiums

The cost of peace of mind is likely to increase as climate damage becomes a more frequent and expensive risk. As property and casualty insurers cover billions of dollars in damages caused by weather and climate-related events, they will likely increase risk premiums, leading to higher insurance costs for businesses.

Reducing Climate Change Risks

Acting now to mitigate coming climate change risks can help businesses create better bottom lines and stability for themselves, employees, and partners in the future. Here’s a look at some climate change investments businesses may want to make now.

Diversification of Coastal Real Estate Holdings

While coastal areas are not the only locations impacted by climate risks, they bear the brunt of rising sea levels and tropical storms. As a result, businesses and investors may want to diversify real estate portfolios heavy in coastal properties. Including inland properties or different coastal properties can mitigate some losses during critical events.

Diversification is also an opportunity for operations. For example, businesses with warehouses, call centers or other operations properties on or near the coast may want to engage in disaster planning to create redundancies with backups in other locations.

Focusing on Building Efficiency and Disaster Resilience

Energy-efficient processes put businesses in a more competitive space as reliance on sustainable energy becomes a more prevalent concern among governments, customers and investors. Efficiencies assist with attracting those interested in ESG impact investing. It also reduces business reliance on power utilities and infrastructure, making rapid recovery after a disaster more likely.

Creating a Diversified Supply Chain

Diversified supply chains are a significant risk mitigation step, particularly for businesses that need raw goods or inventory shipped from overseas. Companies can also look to invest in green or circular supply chains to reduce their environmental impacts. Increasing eco-conscious supply chain diversification efforts can help relieve some of the impending climate risks.

Focusing on Water Quality

Turning to business processes that impact water quality is one-way organizations can stave off financial risks from government issues. It can also position businesses as climate-friendly organizations, leading to potential support from ESG investors.

Paying Attention to Emission Profiles

All businesses can look to create better emission profiles. In some sectors, such as agriculture, reducing emissions can mean overhauling accepted standard modern practices that have led to climate-negative outcomes that aren’t necessarily required to get the job done.

Preparing for Carbon Regulations

Carbon regulations are already part of governance changes in most nations, and businesses can expect them to grow. Getting ahead of the game by preparing for increased regulation can help businesses avoid hefty fines or taxes and position themselves as eco-friendly leaders. Investing now in alternative or renewable energy is just one-way businesses can prepare for the future.

Whether businesses are working to inspire ESG investors now or position themselves for better stability in the future, environmental integrity is essential in climate change investment.