An understanding of the climate risk universe will enable organisations to achieve two critical objectives. The first objective is to manage risk better and, second, to take advantage of opportunities.
Therefore, organisations can maintain their competitive advantage, build resilience and propel their future viability. Climate risk consists of three main risk categories: physical, transition, and liability.
Physical risk is described as the risk of loss from the environment resulting from the effects of climate change, such as droughts, floods, and wildfires, to name a few.
Transition risk is the loss from transitioning from a high carbon economy to a low carbon economy in response to climate change, such as technology disruptions, changing stakeholder expectations, and government actions, to name a few.
Liability risk is the risk of loss from parties seeking compensation from organisations they hold responsible for the climate-related losses they have suffered. Using these three risk categories, organisations can begin building their climate risk universe. Some of the risks to consider include the following.
Organisations must consider the impact of extreme weather events, natural and human-made environmental disasters on their operations and supply chain. Organisations can extend this to cover the effect of loss of biodiversity as well.
Additional risks to consider include the impact of water and food crises, social instability, changes to government policies, increased stakeholder pressure, non-compliance risks on regulations, an increase in infectious diseases and a rise in climate-related litigations.
Organisations will have to evaluate the effect of each risk, paying attention to those with a material impact on the organisation.
These impacts include business disruptions, commodity price volatility, food security, migration, new taxes and penalties, changes to consumer preferences, geopolitical conflict over resources, and the broader effects on industries such as energy, real estate, transportation and agriculture.
By assessing the business implications of the climate risk universe, organisations can manage their risks better while pursuing growth opportunities.
Organisations that fail to build their climate risk universe will be unable to comprehensively assess the risks and opportunities which could adversely affect their ability to operate sustainably in the long term.
Applying the climate risk universe is imperative for organisations that want to succeed long-term. Periodically organisation will refine and reassess their climate risk universe and make changes where required.
Akinyemi Awodumila is a Partner at Deloitte East Africa. He is an author who writes and speaks widely on corporate reporting topics.
