How to undertake a climate risk assessment

As a businessperson clicking to read this article you are already several steps ahead of your peers.

Numerous surveys have shown that the majority of companies, both large and small, are still not far-sighted enough to take the assessment of climate-related risks seriously. There are exceptions of course, in industries such as insurance and to a lesser extent the utilities and public sectors, but climate change risk assessment is mainly confined to the back-burner.

Smaller companies have an excuse of course. Britain is only just coming out of the worst recession in decades. According to Rodolphe d’Arjuzon, author of a recent report by London-based research company Verdantix that examines how businesses assess the impact of climate change, "most smaller companies are focused on the short term" rather than the longer-term threats posed by climate change. "It's about surviving financially and keeping going," he adds.

However, the pressure on larger organisations to take climate risk assessments is mounting.

Not only are there huge operational benefits to be had from knowing which areas of your supply chain, operations or investment portfolio could be at risk from expected climate impacts, there is also increasing pressure from shareholders for firms to get a handle on their climate risk profile. Investors backing projects that could take several decades to deliver a return, want to know how their investment will be impacted by anticipated changes in rainfall patterns, sea levels and extreme weather risks, not to mention potential changes in legislation and consumer behaviour. As a result, growing numbers of investors, led by the Ceres sustainable investment group, are lobbying for businesses to include details of climate risks in annual reports.

Significantly, these investors recently secured the backing of the Securities and Exchange Commission (SEC) when in January it issued guidance to companies on how to report their exposure to climate change in their financial filings. The SEC highlighted four areas where climate related disclosures may be required: physical impacts of climate change; impact of legislation and regulation; impact of international accords; and the indirect consequences of regulation or business trends.

That broad template gives all companies a good outline of what they should be looking for when undertaking climate risk assessments. However, the SEC provided little information on how best to undertake such an assessment and ensure that risks are adequately accounted for.

Fortunately though, there is plenty of information and advice available to help firms find the answers. The Pew Center on Global Climate Change; a coalition involving IBM, consultancy Acclimatise and the Carbon Disclosure Project (CDP); and the UK Climate Impacts Programme UKCIP), have all separately published recent advice designed to help businesses assess how climate change could affect their operations.

The first step all firms should undertake is to check whether they need to carry out a detailed climate risks assessment.

It could be argued that every company will be impacted by climate change and should be aware of the risks. However, some firms are more vulnerable than others and it is these high-risk operations that should invest more in working out their risk profile.

In its report Adapting to Climate Change: A Business Approach, the Pew Center advocates a screening process to identify the potential risks of near-term and long-term climate change, as the first step in determining whether or not a risk assessment is necessary to identify further actions.

It recommends that simple early screening should answer three important questions: is climate important to business risk? Is there an immediate threat or are long-term assets, investments, or decisions being locked into place? Is a high value at stake if a wrong decision is made? If a business answers yes to one or more of the questions then it is likely to be in the businesses interest to undertake a more comprehensive assessment of climate risks.

IBM, Acclimatise and the CDP offer a good introduction to assessing those potential climate risks, setting out 10 questions – that inevitably lead to many more – which company executives should ask to help their companies improve their resilience to inevitable climate change.