Climate-Related Risk
A global problem, climate change brings destructive effects. These effects are affecting various sectors. Its risk involves an unfavourable impact on any organization’s operation. Hence, it’s something that concerns everyone, especially businesses and investors. We need to understand climate-related risks and how they work.
These risks can be physical or transitional. The physical risks are the direct impacts of climate change. It includes natural disasters, droughts, and heat waves. Technological advancements and changes in consumer preferences are transition risks.
Climate change has harmful effects on our planet. It also negatively impacts society and the economy. Thus, this article attempts to bring understanding to all. Mainly on how climate-related risks work. What are their key features? And what are the opinions of experts?
How it works
There is an increasing accumulation of greenhouse gases in the air. It’s mainly one reason climate-related risks happen. These gases are primarily carbon dioxide. They confine heat from the sun. It causes the rise of the temperature of the earth. As a result, the following happens:
- melting ice caps
- rising sea levels
- hurricanes
- droughts
- wildfires
The situation mentioned above can further result in dangerous conditions. An extreme hurricane can damage the framework. It can disturb supply chains. It’s harmful to the local economy. Meanwhile, a prolonged drought can reduce agricultural production. As a result, there will be food shortages. Moreover, price hikes on essential commodities happen.
Climate-related risks can affect in different ways. A company’s financial performance can be affected. Decreased asset values are another notable impact. Climate risks can also disrupt business operations. It can cause reputation loss. Consequently, it results in legal liabilities.
Key Features
We must know how to identify climate-related risks’ key features. Investors and businesses must understand these features. These can help them measure and manage these risks. Below are notable features of climate-related risks:
- Interdependency: Climate-related risks have a depressing effect on systems. An example of this is a terrible drought that resulted in food shortages. In turn, it resulted in price increases, inflation and economic shakiness.
- Uncertainty: These climate-related risks are unpredictable. It can bring various negative impacts, which can be disastrous. This inconsistent feature of climate-related risks makes it hard to make ample preparation. It’s also challenging to make suitable investments decision. Or adjust to changing climate conditions.
- Complexity: These risks are complex. It involves several factors. They can be physical, economic, social, and political aspects. These climate-related risks also vary by location and sector. It makes it challenging to identify, measure, and manage them.
- Long-term horizon: Climate change is a long-term issue. Hence, its effects are possible to remain for several decades. So, it’s essential to have long-term scenarios when evaluating climate-related risks.
- Irregular impacts: The impacts of climate change vary. They can occur suddenly and with significant results. For instance, a slight rise in sea levels can bring extreme flooding in coastal areas.
Finalyse experts opinion
Experts from Finalyse believe we can manage climate-related risk. They stated that managing it could provide opportunities for value creation. It can protect against potential financial losses. Experts also implied that businesses must include climate-related risk management in their schemes.
According to Finalyse experts, businesses must set a control structure. It’s one way to manage climate risk. There must be a clear structure of roles and responsibilities to do this. Reporting lines must also be available. Businesses should also conduct consistent risk evaluations. They should assess their relevance and focus on actions.
Moreover, there should be regular monitoring of climate-related risks. This way, businesses can identify risk changes. Thus, they can immediately take appropriate action. Also, there should be strategies to manage these risks. They can diversify supply chains. Moreover, they should embrace low-carbon technologies.