There are a host of pressing challenges and transformative opportunities businesses face due to climate risks. With a focus on the urgency for organizations to integrate climate risk management into their strategic planning, this article seeks to shed light on the multifaceted nature of risks related to the physical impacts of climate change, the transition to a low carbon economy and evolving climate regulations.
Investors are increasingly prioritizing sustainability, urging companies to disclose their climate risks and strategies for achieving emission reduction targets. This shift is not just a matter of environmental responsibility but a critical financial strategy to safeguard investments. Regulatory bodies worldwide are responding with stringent requirements for climate risk and greenhouse gas (GHG) emissions disclosure, making it a compliance issue as well as a financial one.
Climate and broader environmental risks permeate various sectors differently. For instance, the food and beverage industry faces significant challenges from water scarcity and changing crop yields, while healthcare providers must prepare for shifts in disease patterns and drug source sustainability due to biodiversity loss. These examples underscore the interconnectedness of climate and broader environmental risks across different industries and supply chains.
There are also opportunities arising from the transition to a low-carbon economy, such as new markets for carbon sequestration technologies and the development of low-carbon products in traditionally high-carbon industries. These innovations not only help mitigate climate risks but also offer competitive advantages and potential revenue streams.
However, the road to resilience is fraught with challenges. The increased frequency and intensity of severe weather events and chronic climate changes such as drought and heat stress pose direct threats to assets, infrastructure, supply chains and communities, causing operational disruptions and unplanned financial losses. Organizations are increasingly vulnerable to aging infrastructure and public services not built for today’s climate. When utilities are damaged, factories may not be able to run without power or water, if roads or waterways are blocked the distribution of raw material and products may come to a halt. Additionally, as the volatility of these risks increases, the gap in insurance coverage will grow and companies will need to get ahead of planning for these risks. In 2023 for example, economic losses (from natural catastrophes or climate-related disasters) in the U.S. exceeded $350 billion, with insurance covering just over $100 billion . Transition risks associated with shifting toward a low-carbon economy also require businesses to adapt to new regulations, changing market demands and technological disruptions.
A call to action for risk managers is clear: engage with internal stakeholders across the organization responsible for or impacted by climate risks, such as sustainability, business continuity, supply chain, and finance to ensure a unified approach to assessing, quantifying and managing climate risks. Look beyond your own borders and consider the risks and response plans of your supply chain partners and local utilities. A proactive, holistic, coordinated response will ensure businesses are ready not only to comply with regulatory demands but more importantly to plan for and mitigate climate risks, build resiliency, and inform strategic planning and investment decisions. As businesses chart their course through the turbulent waters of climate change, risk managers can play a critical role in navigating uncharted territories with foresight and agility.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
