This article first appeared in Forum, The Edge Malaysia Weekly on September 11, 2023 - September 17, 2023

The effects of climate change pose a threat to almost all industries, either directly or indirectly. Companies should think about the risks that broadly fall into three categories — physical, transitional and liability — when assessing how the changing climate might affect their industry.

The risks associated with climate change are often intricate and complicated. For instance, the effects of global warming on biodiversity and ecosystems have an impact on the availability of food, fuel and water while their impact on economic inequality may lead to regional or local conflict and harm social or state cohesion. Physical risks from extreme weather conditions like flooding, storms or wildfires as well as longer-term climate shifts that result in higher temperatures and rising sea levels could have an impact on businesses. However, transitioning to a low-carbon economy can also come with risks, such as shifts in policy and regulation, technological advancements, changes in consumer preferences, disruptive competition, legal issues and reputational harm.

Too few business leaders are paying the right amount of attention to the associated risks that a changing climate poses to their companies outside of the most carbon-intensive industries. And these dangers are not far off when you think about these examples from real life:

• An international manufacturer of industrial equipment discovered that it must redesign one of its flagship products and then retrofit its installed base if it wants to avoid product failure in regions where climate change is making conditions wetter.

• The transport costs for a major retailer could more than double by 2030 if the world transitions to a low-carbon economy, which was identified as having dozens of critical facilities at an elevated risk of extreme weather.

• One conglomerate discovered that, as early as 2030, extreme weather events could cost it several hundred million dollars annually. Most of the company’s risk exposure is outside of its direct control and is found in its supply chain.

Significant weather events are already affecting business. In 2022, weather- and climate-related events cost the world economy US$313 billion, of which only US$132 billion was covered by insurance. For instance, physical climate risks are particularly prevalent in the agricultural sector. Crops and livestock can be at risk from flooding, drought, extreme cold and extreme heat. According to the Australian Bureau of Agricultural and Resource Economics, farmers have lost more than A$1 billion in the 20 years leading up to 2019 as a result of climate change, primarily due to drought.

It is important to treat climate risks as new business risks. Climate change’s impacts are becoming more evident and widespread, posing significant challenges to businesses in a wide variety of industries. Managing climate risks as part of business risk management is essential for long-term sustainability and success. They can be classified as new business risks for a few reasons:

• Financial impact: Climate-related events, such as extreme weather events, sea-level rise and resource scarcity, can have substantial financial implications for businesses. Companies’ bottom lines are directly affected by climate risks due to property damage, supply chain disruptions and increased insurance costs.

• Reputation and branding: Stakeholders, including customers, investors and employees, are increasingly conscious of environmental issues and corporate responsibility. Climate risks could lead to reputational damage and a loss of trust from stakeholders for businesses that do not address them. A proactive approach to climate risk management can, on the other hand, enhance brand value and improve consumer and investor interest.

• Regulatory compliance: Governments worldwide are implementing new regulations and policies to address climate change and reduce greenhouse gas emissions. Compliance issues, penalties and even legal action may result for businesses that fail to adapt to these changing regulatory landscapes.

• Supply chain vulnerabilities: Climate risks can disrupt supply chains, leading to delays, shortages and increased costs. A company’s exposure to these risks may be higher if it depends on resources or suppliers from climate-vulnerable regions.

• Insurance costs: As climate-related risks become more prevalent, insurance companies are adjusting their premiums to account for the increased probability of climate-related claims. A lack of effective climate risk management may lead to higher insurance costs or fewer insurance options for businesses.

• Innovation and opportunities: Addressing climate risks can lead to new opportunities for innovation and business growth. Energy-efficient technologies, renewable energy sources and sustainable practices can give companies a competitive edge.

• Resilience and adaptation: Businesses that integrate climate risk management into their strategies and operations are better equipped to adapt to changing conditions. Keeping continuity and safeguarding operations and assets in the face of climate impacts is possible when companies build resilience to climate impacts.

• Investor expectations: Institutional investors and asset managers should increasingly consider environmental, social and governance (ESG) factors, including climate risks, when making investment decisions. Climate risk mitigation companies are more likely to attract investment from these investors.

To thrive in an era of climate change, businesses must treat climate risks as new business risks. The proactive implementation of climate risk assessment, mitigation and adaptation strategies can assist companies in navigating the challenges and opportunities presented by climate change. Moreover, businesses can contribute to a more resilient and sustainable global economy by ensuring their sustainability over the long run, protecting assets and protecting investments.

Here are some illustrations of how green insurance can be applied in various contexts:

• Renewable energy insurance: Green insurance companies can offer insurance products specifically tailored to renewable energy projects. These policies would provide coverage for risks related to solar farms, wind turbines, hydropower plants and other clean energy installations. By supporting renewable energy projects, green insurance contributes to reducing carbon emissions and promoting a greener energy sector.

• Green infrastructure insurance: This application involves providing insurance coverage for eco-friendly infrastructure projects. For example, insurance policies could support the construction of green buildings that meet high environmental standards, such as LEED (Leadership in Energy and Environmental Design) certification. Green infrastructure insurance encourages the development of sustainable buildings and urban planning.

• Eco-friendly vehicle insurance: Green insurance companies can offer insurance products tailored to environmentally friendly vehicles, such as electric cars and hybrid vehicles. These policies may include incentives for policyholders who choose greener transport options.

• Conservation area insurance: Green insurance can support the protection and conservation of natural habitats and wildlife by providing insurance coverage for conservation areas. This coverage could help protect against risks like dumping, illegal settlement and forest fires, ultimately contributing to biodiversity preservation.

• Green supply chain insurance: Green insurance can partner with businesses committed to sustainable supply chain practices. This application involves providing insurance coverage that incentivises suppliers to adopt eco-friendly and ethical practices throughout the supply chain.

• Environmental liability insurance: This application focuses on providing coverage for companies to manage their environmental liabilities. For instance, if a company causes pollution or environmental damage, the policy can help cover the costs of cleanup and remediation.

However, insurers need to remove some significant barriers and obstacles before they can fully utilise their financial capacity as investors in environmentally sustainable infrastructure and other long-term assets. In addition to complex regulatory restrictions, including capital requirements, and a lack of investment opportunities of sufficient scale, there are also a number of other factors to consider.

By combining prevention principles with environmentally friendly practices, green insurance can manage climate-related risks through mutual cooperation and solidarity, and thus play an important role in disaster management. The most effective way to avoid fatalities and limit damage from disasters is through prevention and preparedness measures. Non-governmental organisations, donors, insurers and practitioners have an opportunity to shape this by embedding climate resilience in their sustainable development agendas.

Dr Hazik Mohamed is managing director of Stellar Consulting Group, whose clients include multilateral organisations for policy-driven advisory and multinational corporations and micro, small and medium enterprises for corporate strategy on digital transformation and decarbonisation approaches

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