The Ultimate Guide to Conducting a Climate Risk Assessment for Businesses

March 22, 2023
A tornado and lightning hitting a village. Photo credit: Ralph W. lambrecht.A tornado and lightning hitting a village. Photo credit: Ralph W. lambrecht.

If you want to get a handle on how volatile climate conditions can negatively affect your business, a climate risk assessment is a terrific idea. It involves scrutinizing the potential impact of climate risks on a business, which include physical, transition, and liability risks.

Upward-trending bar chart of billion-dollar natural disasters in the U.S. from 1980 to 2023, indicating rising frequency and costs.

Understanding the Importance of Climate Risk Assessments

Last year, eighteen extreme weather events in the United States caused over one-billion dollars in damages. If you look at a graph that shows the number of billion-dollar natural catastrophes in the U.S. since 1980, it’s impossible to miss that the number of such events has been trending upward. Don’t wait to find out how changing weather patterns could affect your company. As the old saying goes, “in the middle of a hurricane, it’s too late to buy insurance.”  

Climate risk assessments are essential for businesses looking to understand and reduce their vulnerabilities to dramatic weather fluctuations. An assessment involves identifying and addressing how changing weather conditions might impact a business. A comprehensive evaluation will look for physical, transition, and liability risks.

By conducting a targeted climate risk study, businesses can identify their exposure to climate risks, prioritize concerns, and develop a plan to adapt to any fluctuating conditions on the horizon.

Step 1: Identify Climate Risks and Prioritize Risks

The first step in orchestrating a climate risk evaluation is identifying the variables affecting a business’s operations. This involves understanding the potential physical, transition, and liability climate threats that an organization faces, based on its geography and operations. Once noted, risks can be ranked based on their likelihood and potential impact and dealt with accordingly. Examples of severe weather threats that businesses may face include:

  • Physical risks: Floods, hurricanes, wildfires, droughts, and heat waves.
  • Transition risks: Carbon pricing, emissions standards, and technological innovations.
  • Liability risks: Failure to comply with climate-related regulations, inadequate insurance coverage for climate risks.
Step 2: Assess the Potential Impact of Climate Risks on the Business

Once climate risks have been jotted down and prioritized, the next step is to determine the extent to which such threats may impact a business’s abilities to function normally. This involves understanding the direct and indirect effects of climate risks on a business, such as financial, operational, and reputational impacts which can come on the form of:

  • Physical impacts: Asset damage, supply chain disruptions, and increased insurance costs.
  • Transition impacts: Reduced demand for products or services, increased costs, and reputational damage.
  • Liability impacts: Legal and financial risks associated with climate change, such as lawsuits or insurance claims.
Step 3: Develop a Climate Risk Management Strategy

The final step in conducting a climate risk assessment is to develop a comprehensive risk-management strategy. This involves highlighting specific measures that can be used to mitigate and adapt to emergent climate perils like:

  • Investing in renewable energy and energy efficiency measures to reduce greenhouse gas emissions and lower energy costs.
  • Developing an emergency response plan to prepare for and respond to extreme weather events.
  • Ensuring compliance with climate-related regulations and building a resilient supply chain.
  • Engaging with stakeholders to build support for climate risk management measures.

Key Considerations for Conducting a Climate Risk Assessment

When conducting a climate risk assessment, there are some key considerations to keep in mind, including:

  • Understanding the potential impacts of climate risks on the business.
  • Prioritizing risks based on their likelihood and potential impact.
  • Engaging with stakeholders, including employees, customers, suppliers, and investors.
  • Ensuring that the risk assessment is based on the best available data and the latest scientific research.
  • Regularly reviewing and updating the risk assessment to reflect new information and changing circumstances.

If any of this seems daunting, it’s important to remember that climate-risk specialists are available to help you safeguard your business from future weather threats. Arbol offers climate risk assessment services that can be structured at various levels based on the client’s risk profile. Our team is well versed in helping corporate risk managers to decide whether, for example, to retain all the risks under a captive or transfer parts of the risk to the commercial market with ease. To learn more, please contact one of our climate-risk specialists:


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