Insights

Climate Change Adaption - what businesses need to know

Name: MHA
Price range: $

· Posted on: November 8th 2022 · read

Climate change will once again be in the global mind frame as world leaders meet in Egypt for the COP 27 Conference. With more unpredictable extreme weather patterns expected year on year, your business needs to begin adapting processes and supply chains today to prepare for this more uncertain and higher risk tomorrow.

The Taskforce for Climate Related Financial Disclosures (“TCFD”) includes 4 key pillars (governance, strategy, risk management and metric & targets) with 11 recommended disclosures to assist organisations report on climate change. The TCFD framework includes physical and transitions risks which need to be considered by the reporting entity.

The planet’s future hangs in the balance, from the record heatwave in Europe to the historic drought in California and the devastating floods in Pakistan, all have been made more likely and more severe by greenhouse gases building up in the atmosphere.

The UN’s World Meteorological Organisation issued “provisional State of the Global Climate Report 2022” which includes the following key findings:

Global temperatures in 2022 are likely to end about 1.15C above the average in pre-industrial times, making it the fifth or sixth hottest year on record.
Melting of ice over land and seas around the world continued to accelerate in 2022, with the area covered by sea ice in Antarctica reaching a record low in February this year.
The total volume of glacier ice fell 6% this year in Switzerland following low snowfall in winter, dust coatings from Sahara sand storms and an exceptionally warm European summer.
The melting has led to sea levels reaching record highs this year, with an increase of 10 millimetres (0.4 inches) in the past two years alone. While that may not sound significant, it represents approximately 10% of the sea level rise recorded since satellite measurements began in 1993, indicating that process is accelerating.
Record-breaking rain in July and August in Pakistan was made worse by climate change; and
Most of the northern hemisphere registered record heat levels, with China suffering through the most extensive and long-lasting heatwave since national records began, as well as the second-driest summer on record.
In Europe, the heat wave led to thousands of people dead, with the first official figures estimating 2,800 deaths in the UK, 4,500 in Germany among those over 65 years old, and 11,000 in France.

Climate change is here! and is increasing the frequency and severity of extreme weather events (floods, droughts to heat and storms). In Europe’s drought, the worst in more than 500 years, was so significant that these shrinking bodies of water revealed “Spanish Stonehenge”, “Second World War battleships” and “hunger stones” (of which one of them was carved in the 15^th century). In Texas, severe drought revealed previously submerge dinosaur tracks left in the mud 113 million years ago.

Physical risks explained

Physical risks as defined by TCFD relate to specific weather events that are creating longer shifts in the weather patterns.

There are two types:

Acute – these are event driven and stem from increased severity of extreme weather cyclones. The financial on your organisation could be reduced revenues, higher costs from negative impacts on the workforce and write offs.
Chronic – these are longer term and include changes to precipitation patters, rising temperatures and rising sea levels. The financial impact for your organisation could be increased operating costs, increased capital costs and increased insurance premiums.

The key physical risks facing the United Kingdom are:

Flooding – by 2050 per NASA researchers, it is expected that Bristol will be completely inundated. Flooding has negative impacts on soil health and will cause increased costs from property damage.
Air pollution - In 2019 over 80% of the UK recorded levels of air pollution above the World Health Organization recommended limit.
Rising temperatures – this brings about risks to human health, wellbeing and productivity from increased exposure to heat in homes and other buildings
Fires – in July 2022, we saw more forest fires within the space of 1 month than ever before on record.

Climate adaption explained

Climate adaptation needs to be understood by businesses. Climate adaption refers to changes in processes, practices and structures to moderate potential damages associated with climate change.

Countries and communities need to develop adaptation solutions and implement action to respond to the impacts of climate change that are already happening, as well as prepare for future impacts. The following are examples of climate adaption measures:

Large-scale infrastructure changes, such as building defences to protect against sea-level rise, and improving the quality of road surfaces to withstand hotter temperatures.
Large investment in flood defences mechanism.
Nature-based approaches such as the preservation and restoration of forests, wetlands and mangroves, the improvement of soil fertility and landscaping for fire management.

Physical risks are crystallising and increasing! Businesses should consider the following for this reporting period:

Do we have the right and governance at board level to understand and conduct an asset level climate risk assessment. If you don’t, do speak to a specialist! don’t wait until you are impacted by the requirements on climate disclosures issued by UK government.
Perform an asset level physical risk assessment and review your balance sheet for any long-term assets (non-current) that may be impacted by these incremental physical risks! Have you considered if any of the findings of your risk assessment impacts the useful economic life assumptions of your assets?
Speak to your critical stakeholders on what they expect from you on this assessment (for example insurers and creditors). This may result in changes in your business model and assets you control.