How businesses can become more resilient to the physical impacts of climate change

TThe physical impacts of climate change are already impacting businesses across sectors and geographies, impacting employee well-being, damaging properties and assets, and disrupting operations and supply chains. More frequent and intense fires, storms, extreme heat, floods and droughts are having far-reaching impacts on businesses across sectors and geographies. For example:

Excessive heat is increasingly affecting workers’ health, the quality of perishable goods, packaging and even asphalt, making transportation more difficult. Water deficit is becoming a major threat to global supply chains, and its effects are already being felt in agriculture, manufacturing and energy. Heavy rainfall leads to, among other things, power outages and property damage; in April 2024, record rain cost the Emirates airline $110 million. Other major recent climate disruptions include flooding that interrupted supplies of essential semiconductors in Malaysia.

At 2 degrees Celsius of warming, the proportion of these three distressed asset classes is expected to approximately double, to 41 and 52%, respectively. Continued global warming will put more pressure on businesses, communities and governments. Adaptation does not signal a defeatist attitude or diminish the importance of mitigation. Responding responsibly to the crisis that is already upon us is essential.

Failure to adapt to these changing risks will make risk management much more difficult in the future.

Extreme weather events have impacted 50% of corporate respondents to a recent Marsh survey conducted over the past three years. This highlights the importance of taking significant action now to adapt and increase resilience. Understanding and adapting to meet these challenges is clearly the responsibility of risk managers.

Despite the uncertainties surrounding the exact time and place where extreme events will occur, many current tools can be used to determine how physical risk impacts a company’s operations and key partners and stakeholders: enterprise risk management, business continuity planning, and supply chain management offer good solutions entry points to increase enterprise resilience to today’s and tomorrow’s threats.

Enterprise risk managers may find climate adaptation terminology complex and confusing. But simply put, it’s about dynamic risk management, looking to the future and taking preventive action to ensure that climate shocks do not derail business success.

Climate adaptation refers to actions that increase climate resilience and enable us to better cope with a changing climate – from protecting employee well-being to protecting assets and operations in the face of evolving threats.

Enterprise risk managers must therefore avoid disruptions, recover quickly from losses, and anticipate and respond wisely to changing risk trends.

However, in addition to reducing damage, adaptation offers a number of other benefits – including increased efficiency, social and environmental benefits, and potentially better insurance conditions. It also provides risk managers and sustainability professionals with a strong response to constantly changing reporting requirements.

The Global Center for Climate Resilience and Adaptation provides organizations with more information on climate resilience and adaptation strategies.

The Marsh Corporate Adaptation Survey provides insight into how companies are currently approaching the challenge of adapting to climate change. The survey shows high awareness of physical risks – 83% of respondents are already considering the effects of climate-related physical risks.

However, many corporate climate change adaptation strategies lack quantitative and systemic analysis: 48% of companies assess climate risk only at a qualitative level and lag in quantifying current and future impacts. At the same time, many system-level issues (e.g. suppliers (30%), governments and regulators (29%), ecosystem resources and services (21%), and capital providers (13%) are still only assessed by a minority. Encouragingly, 90 % of respondents have already discussed climate change adaptation needs and plans.

When asked about the type of adaptation activities currently being implemented, three most important areas appear:

Looking ahead, organizations also mention the need to invest in asset engineering to recover faster from extreme events (24%).

The study also shows that many companies still struggle to find a clear business case for adaptation despite the widely recognized high cost-benefit ratios of adaptation measures. However, 43% of respondents do not use cost-benefit analysis to make the business case for adaptation, and less than a third of companies (29%) currently consider adaptation and resilience as part of the insurance planning cycle.

Companies need to understand their vulnerabilities and use this knowledge to strategically plan and secure the future. These results and the adaptation pathway for businesses are discussed further in the soon-to-be published Marsh Report: How Businesses Can Become More Resilient to the Physical Impacts of Climate Change.

Enterprise risk managers are uniquely positioned to implement a dynamic approach to risk management, drawing on their extensive experience, existing tools, and innovative data and analytics. There are three key areas where risk managers can help shape successful enterprise adoption:

Addressing the multifaceted impacts and risks of climate change requires that adaptation strategies take into account broader, system-level factors – everything from capital providers and government regulators to suppliers, infrastructure and customers, as well as ecosystem services and local communities.

To be successful, a corporate adaptation strategy requires a 360-degree view of risk. There are asset-level issues to consider, such as the company’s core business, people, physical assets, and emergency response. But it can’t stop there.

Corporations must address vulnerabilities in the supply chain, consider how best to protect workers, work with nature to reduce risk and move from a “cost” to an “investment” mindset.

Climate change adaptation is fundamentally a forward-looking form of dynamic risk management. Risk managers have many tools at their disposal to increase resilience; however, a holistic approach is needed to achieve real, step change in the way corporations address physical climate threats. In this way, business leaders can build a robust, resilient and responsible adaptation strategy.