This is a post by David Beer (Steering Group Adviser) and was also published on the Guardian Sustainable Business and IndustryRE websites.
Extreme weather, such as the January 2011 flooding in Australia, highlights the case for businesses to become more resilient.
The floods in Queensland, Australia, illustrate how extreme weather conditions can affect the economic life of a region. The flood bill for this particular event could exceed A$5bn (£3bn), and it is notable that it comes in the same week that insurance company MunichRe has published a report indicating that 2010 was the worst year since 1980 for losses to industry from natural disasters.
Queensland has a vast mining industry and produces almost two-thirds of the world’s coking coal. The extreme weather has washed away rail networks that link several mines to the seaports, halted coal trains and left a queue of ships waiting to be loaded. These delays will have a massive impact on the sector and the value chain that relies on the exports. This will have ramifications for energy prices as there is still a heavy dependence on coal.
The effected mines are now under force majeure, a contractual clause allowing mines to miss delivery deadlines without penalty. This has affected some of world’s largest mining companies such as BHP Billiton, Mitsubishi, Anglo American, Xstrata, Rio Tinto, Peabody Energy, Vale and Macarthur Coal. But is open to question how long they can use the clause as a defense for failing to meet delivery schedules.
This is not just an issue for the mining industry, governments and insurance companies. It can affect operating costs and corporate profitability in many areas, and too often such risks are overlooked by business leaders, who subsequently find themselves ill prepared to cope.
Creating adaptation strategy, or building climate resilience into corporate decision making, has not been a key focus for many businesses, but these events clearly show that it should be a key consideration. This is not the first time that businesses have been hit by natural disasters and planning for it should be a central tenet of corporate risk strategy. Companies with complex supply chains and large fixed assets should be including measures to mitigate the risks from weather – and, in the longer term, climate change – into their operational and strategic plans. It should be treated not just as contingency planning but as a core element of business risk.
As the climate changes, traditional operational margins, headroom and thresholds are being eaten away, and companies are not taking account of the relevant risks in their policies, business planning, operations, health and safety procedures and risk registers. There is now sufficient evidence to prove these events are reasonably foreseeable, and appropriate action should be taken to remain competitive and reduce your risk of exposure.
Banks, investors, insurance companies and governments are beginning to put out position statements on how they see the risks from climate change. While this is not yet part of their mandatory processes for providing support to industry, they are moving in that direction. With this in mind, businesses have to ask themselves some tough questions: How will your business respond when your key stakeholders challenge your climate resilience position? Are you prepared to disclose this information? And how robust is your current risk assessment process?
Those that have clear answers to these questions will be best placed to win the support of financial organisations and governments in the future.