Climate change is ‘risky business’ for your supply chain

By Paul May >>

THE ENVIRONMENTAL cost of natural disasters is now an almost daily feature on the news agenda, yet many businesses are still doing little to address their own vulnerability.

It’s not difficult to see why natural disaster management often falls by the wayside. By its very nature, an unpredictable event is not something your business can control. In the face of more pressing issues and the next earnings season, it’s easy for events like natural disasters to be relegated to the end of a ‘to do’ list.

But these assumptions, like the weather, are changing as extreme events make the threat increasingly impossible to ignore. Just this year there’s been a mass fish death, floods in Townsville, bushfires across Tasmania and we recorded the hottest month in our national history. 

Some of our biggest local brands are already factoring in this risk. Telstra is preparing for the impact of bushfires on phone towers, Crown is flood-proofing its casinos and BHP is protecting itself against cyclones that could seriously disrupt its iron ore exports.

The rising number and severity of extreme weather events looks sure to continue. According to the CSIRO’s 2018 State of the Climate report, Australia will see more extreme flooding caused by rising sea levels, wind and rain damage from tropical cyclones and increased bushfires thanks to drier weather.

Climate change is no longer just a political talking point – it’s a business reality. Mitigating the potential impact means tackling it head on.

A CONNECTED WORLD

The increased risk of natural disasters caused by climate change isn’t limited to Australia’s borders. Thanks to the global nature of supply chains, those risks spread across the region and around the world regardless of the industry your business operates in.

Given its proximity, Asia plays a key role in many Australian supply chains, particularly when it comes to low-cost manufacturing. This region encompasses some of the most disaster-prone areas on the planet – from typhoons in Hong Kong to flooding in Thailand.

While they impact every part of a business, the extended supply chain is not always the first thought when it comes to climate risk mitigation.

But it should be.

The potential financial and economic implications of natural catastrophes include a long-term negative impact on your business growth, financial security and even brand reputation.

A MATTER OF WHEN, NOT IF

The onus is on your business to assess natural disaster risk and ensure adequate resilience. This responsibility usually rests on the shoulders of executive directors and, as climate change risk becomes more obvious, this liability is fast becoming more personal.

In a landmark opinion, Sydney-based senior counsel Noel Hutley and barrister Sebastian Hartford Davis have written that there are now “significant and well-publicised risks associated with climate change and global warming that would be regarded by a court as foreseeable … large-scale firms would be expected to invest seriously in capabilities to monitor, manage and respond to climate change risks”.

They further argue that individual directors could be exposed to climate change litigation if they’re not appropriately managing risk.

It will also impact business more generally. There has been an increase in shareholder activism, where groups of advocates pressure businesses to change their approach to climate risk.

The Australian Centre for Corporate Responsibility and other groups have called for Australia’s biggest banks, utilities, insurers and miners to improve disclosure and improve risk management.

WHAT CAN BE DONE

With this growing liability, how should your business manage the increased risk posed by climate change? Rigorous analysis is key.

Understanding the vulnerabilities means decision-makers know where to act. Loss prevention measures taken proactively as part of capital allocation decisions help to futureproof your business.

Tools will come in handy here, including FM Global’s Global Flood Map. This provides a worldwide view of moderate and high-hazard flood zones but, rather than using historical and statistical data, it is based on scientific fact using parameters such as rainfall, evaporation, snowmelt and terrain.

These considerations are increasingly important as natural disasters caused by climate change continue to grow in both frequency and ferocity. As the world moves into a new era of risk, your business directors have a responsibility to ensure they’re managing it appropriately.

The likelihood of natural disasters impacting your business has never been higher. It’s time to be prepared.

www.fmglobal.com.au

Paul May is the operations engineering manager for FM Global, an international insurance group that focuses specifically on commercial and industrial property insurance and assists its client businesses to become more resilient and better prepared for natural disasters and business interruptions.

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