How Leaders Are Chronically Underestimating Physical Climate Risk

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How Leaders Are Chronically Underestimating Physical Climate Risk

In a recent Verdantix survey, only 37% of the 200 risk leader respondents acknowledged physical climate risk as a significant threat to their operations; 40% felt they faced minimal to no threat from physical climate risk. After an incredibly hot boreal summer filled with wildfires and floods around the world, there’s some cognitive dissonance going on.

When I mentioned our survey findings at the Verdantix roundtable at NYC Climate Week, some attendees weren’t surprised, noting that firms have always had to deal with the weather. To clarify, these experts in climate risk were not confusing climate and weather – they were simply noting that many organizations already have plans in place to deal with extreme weather events such as floods or hurricanes. While true, firms’ existing plans are not predicated on what the science tells us is coming.

In 2005, the one-two punch of Hurricane Katrina and Rita in the Gulf of Mexico caused billions of dollars of damage to pipelines and platforms. The storms were so strong that existing design standards for offshore structures had to be revised. If we think about our built environment in the context of climate change, it’s safe to assume that most of it is designed to withstand the climate of the past – and existing plans will only go so far to protect firms from costly damages.

In this situation, organizations have a few options: they can rely on insurance in the instance of an event, they can modify existing assets to new design standards in hopes of protecting them, or they can move locations, attempting to avoid the risk completely. All these options cost time and resources, and insurance cannot be the only fail-safe. We’ve already seen insurance firms pull out of residential markets in California and Florida in part due to climate-related risks – and policies are likely to get more costly for businesses. These options also do little to mitigate the costly risks to supply chains or employees, particularly if either of these are based in vulnerable areas.

For the 40% of firms who think they face minimal to no threat from physical climate risk, it’s time to reconsider. While I’d like to be wrong about their exposure to physical climate risk, I’m not sure they should gamble their organization’s future on it.

For help in assessing your firm’s physical climate risk and benchmarking progress against competitors, see the Verdantix Green Quadrant: Climate Change Consulting 2023 and Verdantix Climate Benchmark, respectively.

Katelyn Johnson

Senior Manager, Risk Management

Katelyn is a Principal Analyst in the Verdantix Risk Management practice. Her current research agenda focuses on climate risk and its integration into risk management frameworks. Prior to joining Verdantix, Katelyn was a climate scientist at GNS Science in New Zealand. She has previously held roles in the energy industry, where she helped projects manage risk due to weather and ocean phenomena. Katelyn holds a PhD in Geology from Victoria University of Wellington and an MS in Earth Sciences from Ohio State University – both focusing on climate science – as well as a BS in Meteorology from Texas A&M University.