No business is immune to the devastating effects of climate change anymore, as we saw from the onslaught of extreme weather events in 2017. Disasters brought more than $300 billion in damages this year, a 60-percent increase over 2016, Swiss Re reported last week.
As every business leader has long known, storms, flooding, wildfires and other calamities all threaten to disrupt their operations and growth, and can even affect an entire supply chain.
What’s new is that shareholders and potential investors are also now aware of the risk that extreme weather and natural disasters pose to “doing business as usual.”
Unsurprisingly, a growing number of companies are factoring resilience to climate change into their operations. It’s about the bottom line: Making a company more resilient is an investment in business continuity, shareholder value and overall performance.
Here are five concrete steps businesses, large and small, can take to hedge against climate risks.
1. Analyze your vulnerability in an unpredictable world
The first step is to do a business impact analysis, that will identify risks, simulate worst-case scenarios and identify ways to reduce your exposure. A comprehensive analysis will assess the financial vulnerability of all mission-critical aspects of your business, from operations to suppliers to information systems.
The goal? To have a multi-dimensional understanding of the “balance” between investing in risk mitigation and keeping costs down.
By implementing solutions, and then stating your plan clearly in an annual report, you will make potential investors feel much more comfortable about your ability to function in an unpredictable world.
2. Start with your own operations: Whole Foods
Shoring up your own operations, including your local infrastructure, is an important first step.
Any business with operations in Houston, Puerto Rico or California can attest to the value of proactive risk mitigation – or lack thereof. That’s why microgrids are such a growing phenomenon, especially for campus-based businesses.
Case in point is Shedd Aquarium in Chicago, which realized early on that having control over a discreet power source was essential for protecting the company’s primary asset: live fish. HP Hood, producer of dairy products; Whole Foods, which sells perishables; hospitals and cities have come to the same conclusion: The ability to continue operations in the face of disruption is just smart business.
And with the falling cost of renewables and battery systems, powering and storing that energy sustainably is becoming increasingly affordable.
[Tweet “In 2017 extreme weather events brought $300B+ in damages, affecting businesses’ operations, growth & #supplychain. Here are steps companies including @Walmart @shedd_aquarium @WholeFoods @Starbucks @LeviStraussCo are taking to hedge against climate risks”]
3. Know your supply chain: Starbucks
Even the simplest supply chain can be an opaque, multi-tiered mystery. Mapping it means understanding not just your own suppliers’ risk, but risks that suppliers face.
Risk management should become a regular part of discussions, key performance indicators and reports whether or not risks are occurring. This may also require training and education – maintaining relationships with all tiers of suppliers is essential.
Case in point: Starbucks. Warmer temperatures and more rainfall are having a direct effect on Starbucks’ sourcing of coffee from Africa, Asia and Central America. Many coffee farmers struggle with decreased production and an influx of disease and pest hurting their crops.
So the coffee shop giant is now working with farmers and researchers to develop new coffee varieties that can withstand disease or changing temperatures, as well as better soil management practices.
Depending on who and where their suppliers are, virtually any global company today will need to adjust to a hotter and stormier climate – and those who do it sooner rather than later will come out ahead.
4. Diversify and innovate: Levi Strauss & Co.
If raw materials become scarce and prices rise in a changing climate, this will ripple down the chain to reach businesses halfway around the globe.
We’ve already seen this happen in places like France, where a butter shortage following a summer of drought increased costs for bakeries and restaurants across the country.
Levi Strauss & Co. is anticipating a dramatic drop in cotton yields due to drought and unpredictable rain patterns. So the jean maker is now developing jeans made from more recycled cotton, experimenting with new material that will be less vulnerable to climate risks. Businesses that can project future shortages and changing markets will have more time to adapt and look for new opportunities.
5. Address climate change, the root problem of it all: Walmart
Of course, adaptation is only half of the solution. Today, we have countless examples of business leaders who realize that reducing greenhouse gas emissions is imperative to business growth and a healthy bottom line.
Walmart, for example, has asked its vast supply chain to slash 1 gigaton of greenhouse gas emissions, while making its fleet of trucks and buildings more energy efficient.
Similarly, UPS announced an effort to develop and test a new technology that would convert the company’s delivery trucks from diesel to electric – continuing a trend of businesses seeking to reduce their carbon footprint.
These leading brands are also increasingly demanding sound federal and state climate policies to try to limit future risk. Understanding and assessing climate-related risks is good business, and essential for long-term planning and adaptation.
Business leaders who plan for a more disruptive climate future and act decisively will ultimately differentiate themselves from those that don’t.
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