How exposed is your company to climate risk?

2020-12-01

Sea level rises, air, water and land pollution, deforestation, resource scarcity…how exposed is your company to climate risk? These factors are affecting any country’s economic activity.

It can affect companies indirectly or directly, such as the disruption of supply chains, raw material shortage, property damage, change of location of factories, etc. And at some point, companies may face the risk to adjust its operation and products to these external factors. The changes could be many…from issuing climate and environmental policies, to change the processes, adopt new technology, among others.


Companies must understand that climate is a current risk that can trigger: devaluation of assets, legal claims, adverse environmental impact, disruption to the operation, lack of liquidity and companies’ losses. But above all, it can affect the reputation and image of the company in many ways. Some sectors are more likely to be impacted by climate risk such as agriculture, forestry, fisheries, energy, mining, transport, tourism, etc.


Like any other risk, climate risk may vary from business to business. Geography, the company’s sector and size, regulations, competitors, technology, even political trends are key elements in defining exposure to this risk. Climate risk should be included in the company’s risk management framework in order to assess, monitor and mitigate it. However, climate and environmental risks have distinctive characteristics, that must be considered: the far-reaching impact, a long-term time horizon and the dependency on short-term action.


The scenarios for the impact should be done in the short, medium, and long term to make a more accurate decision making. After that, which controls does the company has to minimize the climate risk? Who is responsible for what? Allocation of responsibilities should be in accordance with the three lines of defense model. But, how to evaluate climate risk exposure in a more concrete way? And how to know how exposed the company is to climate risk?





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