Early adoption of climate risk strategy for long-term business resilience.

Climate-related impacts could reduce global income by 19% over the next 25 years, leading to $38 trillion in annual losses by 2049. To safeguard operational resilience and long-term viability in an increasingly unstable climate, businesses must address both physical and transition risks.

Physical risk refers to tangible impacts of climate change. Businesses that do not account for climate risks may face direct physical damage from extreme weather events such as floods, droughts, and wildfires. The severe flooding in Malaysia caused by a typhoon in December 2023 highlighted the vulnerability of global supply chains to climate change. The disruption of semiconductor packaging in Klang, a key hub for the industry, led to shortages and operational disruptions for U.S. automobile manufacturers. This incident underscores the urgent need for businesses to adopt resilient models that can withstand the increasing impacts of climate change.

Transition risks emerge from the economic and regulatory shifts necessary to adapt to a low-carbon economy. Companies that fail to incorporate climate risks into their strategies may struggle with the transition, facing regulatory changes, shifts in market preferences, and reputational risks associated with failing to adapt to new sustainability expectations.

At the same time, analysing climate risks can reveal how extreme weather events could disrupt supply chains or lead to stranded assets—where investments in fossil fuel infrastructure become economically unviable due to regulatory shifts. Early adoption of a climate risk strategy is crucial to ensure operational adaptability and long-term sustainability.

Procrastinating on climate risk strategy can lead to severe consequences.

Delaying the development and implementation of a climate risk strategy exposes businesses and industries to several negative consequences, such as:

Financial risks associated with climate change, including asset damage, operational disruptions, and reduced cash flows.

Businesses that postpone climate risk analysis may need to implement emergency measures in response to climate events, which are often more expensive than planned adaptations. These disruptions can lead to difficulties in meeting financial obligations, such as repaying loans, and can decrease a company’s overall value. For instance, in the Philippines, a 1% increase in typhoon damage caused a 2.3% rise in non-performing loans, threatening the financial system’s stability. Alternatively, a company heavily invested in fossil fuel infrastructure might face significant losses if carbon pricing policies are introduced or if demand for renewable energy sources increases rapidly.

Increased Exposure to Policy Changes:

Delaying action exposes businesses to sudden and potentially costly regulatory changes designed to accelerate the transition to a low-carbon economy. Governments may enact stricter policies related to coastal land use, such as banning new developments in areas vulnerable to sea-level rise. If the bank’s collateral—these coastal properties—loses value due to regulatory changes, the bank may face immediate consequences.

Long-term strategy vs. short-term reaction.

The effects of greenhouse gases take time to become prominent, meaning businesses that wait to see these effects clearly will only react to problems once they arise rather than prepare ahead of time. Businesses that don’t adopt a climate risk strategy early will find themselves constantly reacting to new climate realities instead of building a proactive, long-term plan. This reactive approach will leave them behind as competitors.

Importance of Early Action.

Climate risk management requires a delicate balance between addressing immediate physical risks and preparing for long-term climate transitions. Early adopters of climate risk strategies incorporate climate risk analysis as a key element of their overall climate strategy.

As part of this adoption, a multifaceted approach that encompasses both physical risk management and climate transition strategy is imperative. Businesses must identify potential risks—such as near-term climate threats or regulatory changes —and implement adaptation measures to protect operations, supply chains, and infrastructure. As a result, these climate risk management strategies significantly influence factors like:

Tackling sector-specific vulnerabilities.

Physical Risk Vulnerability: The power generation sector is vulnerable to water availability, temperature, and extreme weather events.

Effective climate risk management involves assessing the potential impacts of these risks on power plant operations and energy production.

Transition Risk Vulnerability: The transition to a low-carbon economy poses significant challenges for carbon-intensive industries such as fossil fuel extraction and power generation face risks like stranded assets and increasing regulatory pressure.

To address these issues, businesses must diversify operations, invest in sustainable technologies, and engage with policymakers.

Targeted adaptation measures.

Many countries have building codes and design standards that set mandatory safety and performance criteria for new investments. Still, these are often based on historical weather patterns and do not account for climate change. To overcome this, in Vietnam, road design parameters were adjusted to account for future extreme rainfall events. This targeted approach, based on climate projection, reduces the need for extensive and expensive retrofitting or crisis management later.

Accessing funds allocated for sustainability practices.

Governments are offering incentives to businesses that demonstrate climate leadership. By implementing a climate risk strategy focused on physical risk management, your company could qualify for grants, tax incentives, or rebates to strengthen climate adaptation measures. By integrating a climate transition strategy, like reducing emissions and aligning with low-carbon policies, early adopters can qualify for additional sustainability programs before they become competitive or oversubscribed.

Proactive Compliance with Emerging Regulations:

The Task Force on Climate-related Financial Disclosures (TCFD) and the International Financial Reporting Standards (IFRS) S2 are frameworks that aim to enhance climate-related financial disclosures. With established reporting standards and an emphasis on integrating climate risks into business strategies, these frameworks not only enhance transparency but also drive organisations toward more sustainable practices. As compliance becomes mandatory in many jurisdictions, early adopters of these frameworks can position themselves to meet these future regulations, reducing the risk of non-compliance when mandates do arise.