Economics » Managing climate risks: mitigation and adaptation considerations for businesses

Managing climate risks: mitigation and adaptation considerations for businesses

Manuel Kroeller, associate at international law firm Bird & Bird, highlights how firms can mitigate climate risks, as well as outlining the processes businesses can follow to reduce their own impact on the environment

Managing climate risks: mitigation and adaptation considerations for businesses

The impact of climate change will differ greatly depending on geographical location, and the effects will be experienced differently depending on where you are in the world. Even within each sector and geographical area, businesses will be affected in different ways. How climate change will affect an agricultural company or supply chain in south-east Asia, for example, will be different to its impact on a marketing agency in central Europe.

As well as the physical risks caused by the changing climate, companies also need to navigate transition risks – business risks resulting from social and economic shifts towards a climate-friendly future, such as increased regulatory requirements, litigation risks and enhanced customer expectations. Nevertheless, this article attempts to highlight some of the climate risks businesses will face, considerations for managing these risks, as well as key mitigation measures to consider.

Some of the immediate challenges that arise directly from extreme weather events which are being made more frequent by climate change include damage to infrastructure which may lead to shortages of energy and materials. These will inevitably have a significant impact on the supply chain and availability of products to consumers, some of which may be business-critical items like fuel for the transport industry and various types of components that are necessary to manufacture all sorts of goods like computers or automobiles.

Furthermore, the consequences of extreme weather conditions such as heat waves, storms or heavy rainfall, can affect business operations. The change in weather can also affect employee productivity such as when employees call in sick more often, or cannot come into work, for example if transport is disrupted or their homes are damaged or destroyed. This may sound exaggerated, but it’s already the reality in some countries, particularly given the extremely hot summer and the several major floods which occurred in 2022.

Over recent years there has been an emerging trend of lawsuits being filed against governmental institutions, as well as private companies, for climate change-related damages. Whilst this may open up fresh areas of activity for law firms, businesses should manage and mitigate their environmental impacts in order to avoid the risk of being held liable for these damages.

Whilst the fight against climate change and its effects concerns all of us individually, this monumental task cannot be assigned to individuals or single companies alone. It is up to the state, or a wider community of states such as the European Union or the United Nations, to create the necessary binding framework regulations. Nevertheless, individuals and organisations should take action and do their part, rather than waiting for politicians to initiate change. It should also be borne in mind that clients and potential clients are increasingly looking at how climate-friendly a company is when tendering projects.

Key considerations for managing seemingly unstoppable risks

In the face of physical risks, organisations must take measures to tackle or compensate for the impact of climate change on their business. We must be prepared to fundamentally transform the way we work and produce as we know it today. Dependency on distant trading partners need to be reduced – a lesson which has also been demonstrated throughout the pandemic. If global supply chains are disrupted, the solution may be a return to a more local economy, or stockholding adapted to the new circumstances. If necessary, company sites must be protected against direct environmental impacts by means of structural engineering, and an independent power supply should be ensured. Workforces must be organised in such a way that climate-related shortfalls can be compensated for.

Regarding the security of production sites, businesses should begin evaluating current locations, to consider if they are threatened by climate change impacts be it risks of flooding or (forest) fire or the risk that they could easily be cut off from the transport network and look for alternatives if necessary. However, as more businesses relocate production sites to less vulnerable areas, the availability of safe production sites will become scarce, prices will initially rise and at a certain point there will simply be no more viable sites available. Therefore, it’s vital that businesses address this issue early on and adapt today, so that they are prepared for what lies ahead. It is too late to react only after the power supply is no longer secure, for example, or the factory has been washed away.

It must be clear that sustainability and climate protection must follow a holistic approach and not just be taken into account selectively where it suits and does not require a great deal of effort. Initially, it may take some effort to develop comprehensive objectives and codes of conduct in this area. However, once a “Green Governance” is in place and covers all areas and levels of the company, it will be possible to efficiently take these aspects into account in all activities of a company.

Such a ‘Green Governance’ policy makes it easier for employees, especially in larger companies, to understand which sustainability and climate protection considerations should be taken into account for example when awarding contracts or making purchases. With a comprehensive Green Governance, possible future legal risks can also be covered and, by observing these guidelines, potential fines or legal costs can be avoided.

Mitigation options for businesses

As well as managing risks and preparing for the impact climate change will have on their operations, it is essential that businesses proactively mitigate their impacts on the climate by managing their energy consumption and reducing greenhouse gas emissions. There are already a number of organisations across all sectors and of various sizes leading the way when it comes to mitigating their environmental impact, with the aim of becoming a ‘net zero’ business by reducing emissions across their value chain.

The pandemic has shown how quickly a drastic change to working environments is possible when necessary. For example, the avoidance of non-essential travel, especially by air, should be manageable with modern means of telecommunication.

When purchasing new work equipment, it should also be selected on the basis of sustainability considerations. In manufacturing companies, we need to reduce reliance on raw materials and recycling and upcycling processes should be used as much as possible. In general, energy and resources should be saved, whether by installing energy-saving lamps with motion detectors, waterless toilets, or by offering less meat in the company canteens – there are so many mitigation measures that businesses can take.

It is also vital that businesses raise awareness of the issues caused by climate change not only among employees, but also with suppliers and clients in order to embed sustainability within operations and drive positive change across their value chains. To engage employees, many companies develop guidelines that include suggestions for climate-friendly behaviour, such as avoiding unnecessary printing, managing heating and cooling efficiently, turning out the lights when leaving the room, walking up the stairs rather than taking the lift, using a bicycle or public transport rather than commuting by car, and so on. People today, especially GenZ, also choose their jobs based on the extent to which an employer is committed to climate protection and sustainability. Therefore, from a recruiting point of view, companies have a very important interest in not ignoring the issue of climate change, but actively addressing it. If everyone makes a small contribution, the positive effect of a whole company can be significant.

Regarding global warming, there is still a small chance of limiting the temperature change to 1.5°C, which was the goal established by the Paris Agreement. But in order to achieve this, immediate and drastic measures are necessary. Even if the 1.5 °C target is not met, it is still worth fighting for every tenth of a degree and reducing greenhouse gas emissions as much as possible. Mitigation measures are therefore worthwhile in any case and the contribution of each individual and each company is vital. It is also essential for businesses to manage both physical and transition risks proactively to prepare for the potential physical impacts of climate change and to put their business in the best possible position to succeed in the net zero economy. For both mitigation and adaptation, the time for climate action is now.

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