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Imagine two manufacturers operating in the Southeastern US. Both are aware of heightened flood risk in the region from climate change.
The first company thinks through the risk and ponies up for some proper—but not cheap—flood mitigation infrastructure. The second either doesn’t consider doing this, or decides the cost was too much. In comes a huge, wet hurricane. The first manufacturer avoids the worst of it and production is back up quickly. The second is down for a while, with expensive repairs to boot.
Which company has the advantage in this scenario?
Not every organization has suffered a major natural disaster, but “the minute you do, and you burn a billion-dollar pharmaceutical plant to the ground or you flood it, the next day everybody gets religion for resilience and risk management,” Malcolm Roberts, CEO of commercial property insurance carrier FM, told CFO Brew.
CFOs and other C-suite leaders who view climate resilience as an investment can give their organizations the upper hand over those who view resilience as a line item expense, according to experts CFO Brew heard from.
“Managing climate risk isn’t just defensive. It’s profitable, because adapting creates competitive advantage,” Christof Reinert, head of Risk Management Partners, a business unit of Munich Re, said during a presentation at the Riskworld conference in May. “It enhances trust with your stakeholders, and it improves operational planning.”
Research backs up their claims. Reinert pointed to research by the World Bank that found a 4:1 cost benefit ratio to investing in climate resilience in low- to middle-income countries. Investments included improved early warning systems and more climate-resilient infrastructure. “That’s not just resilience, that’s smart business,” he said.
Another report concluded that the benefits may be even greater. According to a working paper from World Resources Institute, “every $1 invested in adaptation can yield over $10.50 in benefits.”
“Though adaptation is often misunderstood as only helping to avoid climate-related losses, it can also deliver economic, social, and environmental returns,” the paper reads.
Here’s how it’s done. Smart climate investment requires the right mindset and data-informed practices, according to Reinert. For starters, company leadership must recognize that “climate risk is now part of…the core business agenda,” he said.
Organizations should play out scenarios to identify vulnerabilities such as value concentration, risk concentration, and possible supply chain weaknesses. They also must engage with stakeholders including board members and customers, Reinert added.
A key way to become more resilient is to partner with insurance brokers and carriers, which often have risk management tools and services to help clients manage client risks. “The first thing for a C-suite to realize is [insurance] is an investment…It’s not an expense,” Roberts said.
FM has an incentive program to give organizations a little extra nudge toward making needed resilience investments. Four or five years ago, the insurer came up with a “climate resilience credit” that listed policyholders’ biggest climate risk exposures, along with suggested steps to mitigate them. Companies that make the fixes receive a 5% insurance premium credit.
FM has returned roughly $1 billion in premiums through this credit program, and in turn, policyholders are slated to eliminate $50 billion in expected climate-related losses by the end of this year, Roberts said. The resilience credit, along with other climate risk tools, have been “a home run for us,” he said.
Munich Re’s Reinert concluded his remarks by imploring organizations to take a forward-looking view of climate investments.
“Climate resilience isn’t about protecting the past, it’s about growing the future, the resilience of your company, [and] the value of your company,” Reinert said. “That is what you’re protecting…Let’s make climate risk not a liability, but a lever for growth.”