The number of organisations developing climate risk mitigation playbooks in response to potential climate disasters has increased markedly. Climate catastrophe costs continue to rise globally, resulting in economic losses from insured losses and uninsured losses (often referred to as the protection gap).
For example, organisations need to prepare to manage severe physical climate disasters such as floods, wildfires and drought, to name a few. Understanding how climate risks affect an organisation helps it prepare to navigate them with minimal disruptions. Key steps in a climate risk assessment include the scoping of climate risk for the organisation, which involves identifying the organisation’s significant assets and evaluating the related climate risk exposures linked to each asset. Through this scoping process, organisations can map asset locations and begin building the foundation for their climate risk assessment. It also enables organisations to extend coverage across their value chain and build a detailed asset inventory.
The next step is for organisations to assess the degree of exposure of their significant assets to climate risk over time. By overlaying climate risk data with their asset locations, organisations can identify assets in vulnerable or hazard zones. Through this process, organisations can determine the potential adverse financial impact of these specific climate risk exposures on their business and operations.
Organisations can apply sensitivity analysis to understand better how they might be affected financially if certain assets are exposed to different climate risk scenarios, using scenario analysis tools and models.
The final step, which builds on the detailed insights from the first two steps, is prioritisation and response. Armed with insights from the previous steps, organisations need to confidently rank climate risks by potential financial impact and develop a response playbook for managing them if they occur. Responses could range from mitigation and adaptation to risk transfer.
Organisations could also consider climate financing tailored to mitigate climate-related financial losses. Investors today want to understand how organisations respond to climate risks and protect the long-term value of their investments. Organisations cannot ignore the potential adverse financial impact climate risk poses to their business and long-term survival.
Organisations should conduct a tailored climate risk assessment that meets investors’ expectations.