Extreme weather events such as floods, heatwaves and bushfires are becoming more frequent, disrupting operations and damaging infrastructure. Across Australia and globally the widespread impacts of intense weather events serve as stark reminders of the growing need for businesses to proactively adapt and build resilience against escalating climate challenges.
Australian businesses need to be aware of climate-related risks and take proactive measures to protect themselves.
Climate-related drivers for businesses to consider
- Australia's evolving environmental regulations are pushing companies to lower their carbon footprints, resulting in compliance costs and operational changes.
- Health and safety rules are evolving to protect workers from the impacts of climate change such as heat stress. Failure to comply can lead to penalties and reputational damage.
- Rising consumer demand for sustainable products is another driver for businesses to embrace greener initiatives. Companies that fail to embrace sustainability risk losing market share to competitors who are doing more to meet evolving customer expectations for environmentally friendly practices.
Impact of climate change on businesses
Climate change significantly affects profitability and long-term viability. Companies face higher costs related to infrastructure adaptation, sustainable technology and regulatory compliance, including those required to submit climate-related financial disclosures.
In addition to the direct threat of property damage and business interruption from local climate related events, businesses are increasingly exposed to contingent business interruption and additional costs arising from disruptive events locally and in other parts of the world.
Supply chain disruptions are a concern as extreme weather can compromise supplies, raw material availability and transport reliability. One example is the restriction of marine traffic through the Panama Canal in 2023 and 2024 due to record low water levels caused by drought.
Exposure to extreme weather is an additional source of disruption for businesses that have been adjusting to current conditions by outsourcing operations to alternative facilities, both directly and as a result of delays in shipping.
There are also costs associated with resource scarcity such as water-intensive sectors like agriculture and manufacturing which are both a cause and casualty of water scarcity.
Businesses that neglect climate risks may struggle to retain customers, making it essential to develop sustainability strategies and integrate climate risk management into operations.
According to Gallagher research, the rise of climate related litigation is an ongoing concern if businesses miss their environmental, social and governance (ESG) targets especially those they have publicly committed to.
Mitigation strategies businesses may adopt to deal with climate-related challenges
- Implement sustainable practices and energy efficiency by conducting thorough energy audits, upgrading to LED lighting, optimising heating and cooling systems, and implementing smart building technologies to significantly reduce both environmental impact and operational costs.
- Adopt energy efficient technologies, reduce waste and use sustainable materials to lower environmental impact and operational costs.
- Diversify and resilience-proof supply chains. Establish networks across various geographic regions to reduce reliance on single points of failure exposed to localised climate events. Critically evaluate suppliers for their climate resilience and prioritise partnerships with those actively committed to sustainable and robust practices.
- Invest in resilience planning. Conduct comprehensive climate risk assessments to identify vulnerabilities in operations.
- Create comprehensive disaster recovery and business continuity plans that include climate risk assessments and emergency response protocols.
- Enhance climate sustainability reporting and compliance. Stay informed about evolving environmental regulations and ensure compliance through regular audits and updates to policies and procedures.
- Stay updated on environmental regulations and ensure transparent reporting of sustainability practices to meet compliance and stakeholder expectations.
The role of climate-related insurance
Consider purchasing insurance policies that specifically cover climate-related risks, such as extreme weather events, to protect assets and ensure financial stability during crises. Parametric solutions are useful for covering losses from weather events not typically covered under traditional policies. These include non-damage business interruption and damage to assets typically excluded by traditional policies.
By adopting these strategies Australian businesses can better manage climate-related risks and enhance their resilience in the face of evolving environmental challenges.
