SDIM24: How businesses can become more resilient to the physical impacts of climate change

The physical impacts of climate change are already affecting businesses across sectors and geographies, taking a toll on employees’ well-being, damaging properties and assets and disrupting operations and supply chains. More frequent and intense wildfires, windstorms, extreme heat, flood and droughts have far-reaching impacts on businesses across different sectors and geographies. For example:

Excessive heat increasingly affects employee health, the quality of perishable goods, packaging and even asphalt, hampering transport. Water stress becomes a major risk to global supply chains, with impacts already felt in agriculture, manufacturing and power production. Intense rainfall leads to power outages and property damage, among other things; in April 2024, record rain cost airline Emirates $110 million. Among other major recent climate disruptions, vital semiconductor supplies were halted by flooding in Malaysia.

These impacts will become more disruptive in a warming climate. The Marsh McLennan Flood Risk Index reveals stark flooding vulnerabilities for international ports and airports, now and in the future. The index shows that 18% of global airport capacity and 26% of trade outflows through international ports are at risk of flooding.

With 2 degrees Celsius warming, the proportion of these three asset classes at risk is expected to roughly double to 41 and 52%, respectively. Further global warming will put more pressure on businesses, communities and governments. Adaptation doesn’t signal a defeatist attitude or diminish the importance of mitigation. It’s integral to responding responsibly to the crisis already upon us.

Failing to adapt to these changing risks will make the job of risk management significantly more challenging in the future.

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

Despite the unknowns related to the exact time and location of extreme events, many current tools can be deployed to determine how physical risks influence company operations and impact key partners and stakeholders: enterprise risk management, business continuity planning, and supply chain management all offer good entry points for increasing corporate resilience to today’s and tomorrow’s risks.

Corporate risk managers may find the climate adaptation terminology complex and confusing. But in simple terms, it is all about dynamic risk management, being forward-looking and taking prevention measures to ensure that climate shocks do not hamper a business’s success.

Climate adaptation refers to activities that increase climate resilience and enable better coping with a changing climate – from protecting employees’ well-being to protecting assets and operations in the face of changing risks.

Corporate risk managers, therefore, must avoid disruption, recover quickly after losses and anticipate and smartly respond to changing risk trends.

However, as well as limiting damage, adaptation offers a range of other benefits – including increased efficiency, social and environmental benefits and potentially improved insurance terms. And it equips risk managers and sustainability officers with strong response to ever-changing reporting requirements.

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

The Marsh Corporate Adaptation Survey offers insights into how companies are currently approaching the challenge of climate change adaptation. The survey shows high awareness of physical risks, with 83% of respondents already considering the impacts of climate-related physical risk.

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

When asked about the type of adaptation action currently implemented, three top areas that emerge are:

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

The survey also shows that many businesses still struggle to establish a clear business case for adaptation despite the widely acknowledged 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%) are now considering adaptation and resilience as part of their insurance planning cycle.

Companies must understand their vulnerabilities and act on this knowledge in future-proofing and strategic planning. These results and the path to adaptation for businesses is discussed further in Marsh’s soon-to-be-published report: How businesses can become more resilient to the physical impacts of climate change.

Corporate risk managers are uniquely positioned to implement a dynamic risk-management approach, building on their vast experience, existing tools and innovative data and analysis. There are three key areas where risk managers can help shape effective corporate adaptation:

Addressing the multifaceted impacts and risks posed by climate change requires adaptation strategies to consider wider systems-level factors – everything from capital providers and government regulators to suppliers, infrastructure and customers, as well as ecosystem services and local communities.

A corporate adaptation strategy requires a 360-degree view of risk to succeed. It must consider asset-level considerations, such as the business’s core operations, people, physical assets and emergency response. But it cannot stop there.

Corporations must address supply-chain blind spots, consider how best to protect employees, work with nature to reduce risks and move from a “cost” mentality to an “investment” mindset.

Climate adaptation is basically 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 a real step change in how corporations deal with physical climate risks. That way, business leaders can build a robust, resilient and responsible adaptation strategy.