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Businesses Weigh Extreme Weather Risks

Shore damage done from Hurricane Sandy
Such extreme weather events as Hurricane Sandy, the deadliest and most destructive Atlantic Ocean hurricane in 2012, can damage infrastructure and disrupt business. Despite the fact that such events are becoming more frequent, businesses are preparing for the “new normal” using established methods—an approach that could prove inadequate, according to a new report. Wikimedia Commons/Shawn Perez

A new report asserts that many companies are attempting to address climate change issues using traditional practices and historical data.

July 23, 2013—Climate change and the accompanying increase in extreme weather events has become a nearly universal concern of businesses in the Standard & Poor’s (S&P) Global 100 Index, with 38 companies reporting that they have already experienced adverse impacts and 17 expecting to within the next 5 years.

Although these companies are aware of an increasing threat, most have not utilized climate change-specific tools to assess their changing risk picture. Most, instead, are attempting to address the issue through existing business continuity and emergency management plans based on historical information that doesn’t adequately consider the dynamics of a changing environment.

Those are the key findings of a new report issued by the Center for Climate and Energy Solutions (C2ES), a nonprofit organization focused on energy and climate change issues. The report, Weathering the Storm: Building Business Resilience to Climate Change, is based on a review of documents from companies in the S&P Global 100 Index, and in depth studies of six diverse companies, including American Water, a major utility operator that is based in Voorhees, New Jersey.

“Last year more than 800 major weather related disasters worldwide led to over $130 billion in losses,” says Eileen Claussen, the president of C2ES. “These climate impacts are beginning to impose real costs. They damage facilities, interrupt power and water supplies, drive up insurance costs, and disrupt supply and distribution chains. We wanted to know how companies perceive their climate-related risks, what steps they are taking, what best practices in business resilience are emerging, and what is standing in the way.”

To discern the perspective and activities of these companies, C2ES reviewed corporate sustainability documents, annual financial reports, and voluntary reporting to the Carbon Disclosure Project—a nonprofit organization headquartered in London.

“Broadly speaking, the research reveals that while the vast majority of companies recognize risks from extreme weather and climate change, and many see these risks in the present or near term,” the report states. “Uncertainty about the precise nature, timing and severity of climate impacts often inhibits investment in resilience beyond ‘business as usual.’ ”

Claussen says, “Many companies are asking themselves whether they have entered a new normal, and what steps they should take—and when—to build resilience to these increased risks.”

C2ES’s research revealed that 57 percent of the companies are concerned about direct impacts on their production capacity—for example, if extreme might weather damage facilities or disrupt power. Indirect impacts, such as higher prices for commodities or insurance, are a concern for 47 percent of the companies.

“How are they beginning to respond to these risks? Most companies are managing them through existing business continuity and emergency management plans, which is a natural first step,” Claussen says. “But only a few companies say they have used climate-specific forecasting tools to comprehensively assess how these risks are evolving and the potential business impacts.”

The report includes an in-depth case study of American Water, which considers climate change impacts in a comprehensive assessment of capital investments that includes the age, condition, and performance of equipment and the opportunity for increased performance. The report cites as an example a floodwall that the company built at a plant in New Jersey following Hurricane Floyd that then averted damage to the plant during Hurricane Irene. The report asserts that companies leading the way in resilience planning for extreme weather and climate change follow a four-step process that is similar to that used by American Water.

“Step one is to build a common understanding across the company of the risks associated with extreme weather and climate change, based not on the past, but on what could change in the future,” Claussen says.

Once the company understands the risks, the second step is to conduct a comprehensive risk assessment. Step three is to outline specific risk-management strategies that are both adaptive and flexible. Finally, these new risk management strategies should be incorporated into the company’s broader risk-management activities.

“By and large, however, the business response seems so far to be a continuation of existing practices, based on an historical picture of past risks. And it’s not a complete picture because climate change is rewriting our future,” Claussen says.

The report makes four recommendations to improve business resiliency to extreme weather events in the face of climate change—create a clearinghouse of data and analytical tools; increase public infrastructure resilience; create government regulations that accommodate and encourage resilience; and use public-private partnerships to pool government and business expertise.

“What companies say is that they need information,” Claussen says. “They need a centralized clearinghouse for reliable, up-to-date data and analytical tools. They need user-friendly, localized projections of climate change and models that link these projections to business impacts.”

“Leading companies are expanding ... risk-management practices to include the very real and very serious risks that accompany climate change because they recognize that waiting to act can be a costly response,” Claussen adds.



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