ESGRisk Management

Riding the Waves: ERM Navigates Choppy Waters of Climate Change

By May 15, 2024No Comments

As climate change intensifies, ERM teams are fortifying business continuity plans and considering relocation strategies.

More finance teams are identifying climate change risks as significant threats, responding to an increased rate of natural disasters that can disrupt everything from day-to-day operations to global supply chains. At a recent meeting of NeuGroup for Enterprise Risk Management, risk managers commiserated on how they’ve been hit by recent extreme weather, identified areas in need of improvement and shared a myriad of approaches to mitigate the risk of further disruption.

  • One member led a session by presenting on recent disruptions to operations in a data center due to flooding. He stressed the importance of ERM teams having a comprehensive view of the company’s geographic risks. “These are things you cannot just ignore, they have a real-life business impact,” he said. “Resilience and flexibility are more important now than ever.”

Weathering the storm. Many corporates are incorporating strategies to address heightened risks posed by natural disasters into their business continuity plans. The presenting member said it was critical that his team knew how to react.

  • Nine months before the flood, the ERM team led a tabletop exercise preparing for a flood in the area, and how the company would handle that location running at a reduced capacity. “At tabletops, people are engaged, but they just view it as an exercise,” he said. “But once the flood actually hit, they were able to follow the plan well.”
  • In these preparations, the member said, it can be key to reach out to local officials. When creating a continuity plan for flooding in another of the company’s locations, the team discovered that the city planned to build a 12-foot seawall around the area, significantly lowering the probability of a similar flood. “We’re a big taxpayer, and the government wants to know what they can do to help us.”

    Partnerships, preparation. For other members, comprehensive risk tracking within ERM isn’t necessarily realistic without some external support. One member highlighted third-party climate risk exposure as nearly impossible to track accurately without an “army of people.”

    • “We have a pretty good system to vet the relationships when they come on board,” he said. “But who is going back in year two and three—how are the suppliers changing? And third parties have third parties, what if they change?”
    • For some members, consultants and tools can help alleviate short staffing. One member worked with a company called Anthesis, which he said proved helpful when preparing for the knock-on effects of weather crises revealed in tabletop exercises.
    • One member added that his company has regular annual disruptions from non-life-threatening earthquakes due to the nature of the business. His resiliency solution to the disasters is to simply bake in the cost of these events ahead of time using data modeling and accept the risk, rather than use valuable resources to track and mitigate.

    Relocation for long-term risk mitigation? One member, responding to the point about elevated reputational risks in times of scarcity, said some risks are great enough to consider moving locations, as continuity plans can only go so far.

    • He told a story about one of his company’s locations in a desert region using large quantities of water during a drought. Though the company had access to all the resources it needed through a private reservoir, it had to fight intensive scrutiny because nearby communities were forced to conserve resources. “Even though it wasn’t an issue for us, the reputational impact of us using water while the town down the street had to import it was not great.”
    • Another member, whose company has some long-standing locations in high-risk flood zones, recommended frequently evaluating relocation costs against the cost of natural disasters. “We know the cost of a flood,” he said. “So how long does it take and how much does it cost to build a new facility? You might find it within your appetite.”
    Justin Jones

    Author Justin Jones

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