Adapting Today for a Sustainable Tomorrow: Understanding Climate Risks

He listed those numbers as:

• 51°C – the temperature recorded in Saudi Arabia, highlighting extreme heat levels
• 11 storms – the number of significant storms that hit the UK between September 2023 and August of this year
• $280 billion – economic losses due to natural catastrophes in 2023

“These figures underline the pressing need for businesses and governments to adapt and build resilience against climate change now and look at longer time horizons when making business decisions,” Forsyth said. He outlined the case for quick action and long-term climate resilience planning at the ESG Insights and Intelligence conference hosted by Commercial Risk and sponsored by Zurich Commercial Insurance.

Why act now?

Considering even the most optimistic scenarios for climate mitigation, the effects of global warming are already impacting economies, Forsyth pointed out. “The recent record temperature of 51 degrees in Saudi Arabia serves as a stark reminder that we need to address these impacts now, while working towards long-term carbon emission reductions,” he said.

Weather-related losses, mainly from floods and storms, account for 14% of claims in the UK, Forsyth said. That’s the third-highest number of claims and the second-highest by value, at £112 million. “The damage caused by weather-related loss is much greater in terms of costs than from other types of claims, and it has far-reaching impacts on people and operations, beyond just the economic costs.”

The World Economic Forum’s Global Risks Report highlights a major challenge in climate resiliency planning: risk managers and sustainability officers often look at different time horizons when addressing climate risks. While risk managers generally consider more immediate threats to the business during a one- to five-year timeframe, sustainability officers are asked to look further into the future for reporting and regulatory purposes, Forsyth said.

The discrepancy complicates budget decisions and planning, making it difficult to quantify and consider return on investment, he explained.

The situation can be further complicated in organizations where the sustainability officer’s role and profile are not well-established, according to Forsyth. They may not have a seat at the table at senior or strategic levels, which could leave decision-making to others who are not as knowledgeable about the complex climate-related issues that are discussed, he said. Climate risk should be on the radar of all C-suite members, but there needs to be a senior, trusted voice that can ensure the risk is considered in operational business decisions, according to Forsyth.

Avoid the climate data trap

The more high-quality data, the better in managing climate risk, but it’s useless if it isn’t properly used – a trap businesses need to carefully avoid, Forsyth emphasized.

“Just because you’ve got the data, doesn’t mean you’re managing the risk,” Forsyth said. Organizations need to “challenge data” in order to thoroughly understand what it reveals across the business. “While it can be tempting to focus heavily on just the hazards you may be exposed to, such as wind, flood or heat, not taking into account the criticalities and controls means you are missing important parts of the puzzle.”

Climate data is used as a guide to make decisions and to strengthen resilience, he noted. And, it has to be applied in ways that leave room for it to be questioned.

On rare occasions, Zurich Resilience Solutions has found in examining a customer’s flood controls, for example, that the risk isn’t as great as the data indicates, according to Forsyth. “We don’t stay in that safe zone of just having data but not really doing anything with it; we’re really interrogating it on the ground,” he said. “However, this is juxtaposed with the fact that natural hazard events are going to become more frequent and severe, which means the cumulative impact and close proximity of different events must be taken into consideration.”

Swiss Re has pegged global economic losses from natural catastrophes at $280 billion. “That’s a big number,” Forsyth told conference attendees, and “hopefully you’re not going to have a share of that in your business.”

Climate challenges aren’t shrinking

Climate-related risks and the impact of changing weather conditions aren’t going away, Forsyth said. “We don’t often talk about risk in totality or see ESG and sustainability through a risk lens. Even under the most optimistic scenarios, we’re in for a pretty rough ride, economically, from the impact climate change is going to have. So, the discussion is, how do we deal with the effects now and also plan to mitigate in the future?” he asked.

Insurers can support the work that addresses those questions. Zurich Resilience Solutions (ZRS), for example, is well-prepared to help organizations identify, assess and adapt to climate change risks. ZRS relies on decades of risk engineering experience along with historic loss data, customer insights and a proven methodology to tackle these climate-resilience challenges.

ZRS frequently works with customers to help them determine where to start and how to prioritize action and capital spending.

Recently, ZRS helped a number of asset managers with large property portfolios realize that while the hazards for each were similar - notably precipitation, windstorm, heat, and drought - the assets within the portfolios required a wide variety of risk improvement recommendations and produced differing loss estimates across the portfolio, albeit with some commonalities.

In some cases, ZRS has helped customers look beyond the asset type and use the information regarding their exposure to certain hazards to understand the criticality of the asset to their business operations. For one customer, for example, it was discovered that there was more risk posed by climate change to their supply chain than their owned assets. That realization prompted work with key suppliers to understand their approach to resilience.

Such exercises not only contribute to effective risk management, but the same information can be fed into numerous mandated ESG reporting requirements, further revealing the risks and opportunities associated with climate change.

Effectively managing climate risk can’t be done easily or immediately, but by adopting comprehensive risk assessment strategies, leveraging technological advancements, and fostering collaborative efforts across industries and governments, the adverse impacts of climate change can be mitigated. As businesses and communities become more resilient through proactive planning and innovation, they are not only protecting our environment but are also ensuring sustainable growth and prosperity. Embracing these opportunities turns the challenge of climate risk into a catalyst for positive transformation, paving the way for a safer and more sustainable future.