What is climate risk?

Climate change is changing the risk landscape and subsequently the business requirements around the identification, management and reporting of climate risks.

For example, new regulations like TCFD and CSRD, both require climate risk assessments as part of their disclosures.

However, before diving into the deep end and trying to understand a climate risk assessment, we first need to understand climate risk.

What is climate risk?

In a nutshell, a climate risk is a potentially adverse consequence caused by the changing climate.

This adverse consequence can have an impact on anything: a person, a group of people, a product, a business process, a business,  or, indeed, an entire value chain.

The truth is every business faces climate risks.

In addition to having negative impacts on people and wildlife, many climate risks come with large financial implications.

In 2022 alone, climate change cost the global economy US$ 313 billion.

Roughly half (US$ 132bn) of these losses were not covered by insurance.

SMEs are particularly vulnerable to climate risks: a UK study found that the average cost of flood damage ranged between £12,000 - £250,000.

It’s also important to remember that one’s vulnerability to climate risks aren't just dependent on the increased frequency and/or intensity of extreme weather events.

The other key ingredient is exposure level.

For example, if the house pictured above had been built to withstand medium to high magnitude flood events or retrofitted with flood protecting reinforcements, then the damage incurred in the flood event would likely be much lower.

There are many factors that play into exposure (perhaps the house owner couldn’t afford the retrofitting of flood protection or wasn’t aware of their high exposure so couldn’t mitigate the impacts), however it's an important concept to understand when it comes to climate risk.

Climate risk is already materialising

It can often feel like climate change is a future threat and one we don’t need to engage with today.

However the increased severity and frequency of extreme weather events associated with climate change have already started to materialise.

Thus, it's not a case of when climate change happens, but how much more extreme the weather events will become as the world increases to warm.

Climate change therefore is already a very real risk to business and society in all sorts of unexpected ways. Here are some surprising examples.

Climate change is impacting democracy.

Rising occurrences of natural disasters, such as floods and typhoons, cause people from coastal communities to be displaced. If this happens during an election, they are unable to vote, as these events become more frequent and severe, more people face the possibility of being unable to vote. Sadly, this often occurs within the most vulnerable communities who are already under-represented.

Climate change is impacting product recipes.

For example, climate change-related events are impacting the crucial ingredients of the beer industry.

Barley and hops yields aren’t only declining, they’re also reducing the quality which in turn is impacting the flavour profile of beer.

Also, these key ingredients require a lot of water to grow and are often grown in regions prone to water scarcity. As water availability decreases, the cost of water as an input is predicted to increase.

The combination of higher input costs and lower crop yields is a recipe for beverage companies paying much higher prices for key ingredients.

Beer represents more than just a drink to be enjoyed socially. Its supply chains support millions of jobs globally including farmers and their families.

Climate change is impacting workforce health.

As global temperatures rise, our sleep patterns are disrupted and people sleep less on average per night. Sleep deficiency is linked to many chronic health problems, including heart disease, kidney disease, high blood pressure, diabetes, stroke, obesity, and depression.

People affected by wildfires, hurricanes, and other natural disasters (a growing number annually), often struggle to sleep well for months after the calamity.

Add to this the chronic stress caused by climate anxiety, and think of the negative psychological impacts on your workforce.

So how to safeguard your business against climate risks? Take a read of our blog post on just this topic - here.

If you want to learn more about climate risk or how to start taking action to safeguard your business, get in touch at hello@bemari.co.uk to learn how we can help.

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