Climate change risks

Author

Shel

Climate change refers to changes in natural systems. Rapid changes in global weather patterns cause volatility in temperatures and precipitation levels which in turn result in frequent storms, prolonged drought, rising sea levels, increased acidity, land degradation and wildfires.

The genesis of climate change is the greenhouse effect, which is where a build up of greenhouse gases in the atmosphere trap heat, raising the earths temperature ultimately impacting the earth’s climate.

A majority of global warming since 1950 is attributable to human activity. Even though greenhouse gases occur naturally in the atmosphere, excess greenhouse gases are the result of various human activities. These activities include:

  • Transporting people and goods

  • Growing and distributing food

  • Providing heat and electrical power

  • Product development, use, and disposal

  • Operating buildings and their surrounding infrastructure.

To handle the climate change catastrophe, organisations across industries must i) reduce their contributions to climate change (mitigation) and ii) reduce their risk exposure from climate change (adaptation).

To reduce their risk exposure from climate change, companies must first understand the climate risks that they are exposed to. Climate risks refer to the potential financial, social, or environmental harm caused by climate change. There are three main categories of climate risks:

  1. Physical risks: These are actual physical impacts to a company’s infrastructure, customers or supply chain partners that are as a result of climate change, e.g fires and floods. These changes influence supply & demand as resource needs change amidst these conditions. For example, flooding can affect public transport impacting the mobility of employees and distribution of supplies.

  2. Transition risks: Transition risks are those inherent in shifting towards a greener economy. These include factors like policy changes, technological innovations and changing consumer preferences. As decarbonisation intensifies, changing policy may result in many sectors facing major shifts in asset values or higher cost of doing business. For example, assume a coal power plant that operates in country X. If the government of X introduces a carbon tax, it will be expensive to run this business. The demand for clean technologies will make existing technologies less attractive.

  3. Liability risks: These are risks associated with destruction of assets, fossil-fuel industries becoming outdated and obsolete, and mass layoffs due to the transition to clean energy. These risks are faced by financial service firms and the insurance industry.

By understanding and mitigating these risks, businesses can prepare for challenges, reduce negative impacts and show responsibility to investors and stakeholders.

Next: Carbon emissions