Climate Risk: Is Your Business Ready?

BY Nathan Beers Writer Bank of the West

Feb 28th 2021

When it comes to climate change, there always seem to be more pressing matters for small and medium-size businesses, not the least of which has been navigating change during the pandemic. Until recently, it’s been reasonable to view climate as an issue for the Amazons, Chevrons, and Fords of the world.

After all, some 200 of the world’s largest companies have said climate risks could cost their businesses a staggering $1 trillion. That’s equal to two years of economic output from a country like Ireland or Argentina.

But businesses are increasingly recognizing that climate change does not discriminate based on size. In 2020, there were 22 extreme-weather events in the U.S. with damage and loss costs over $1 billion each. Hurricanes hammered the East Coast and wildfires choked the West in record setting numbers. Many businesses—from sole proprietors to Silicon Valley stalwarts—suffered.

Climate change now poses two near-term threats to the operations and the bottom lines of small and mid-size businesses: physical risks and transition risks.

Global Warming’s Small Business Impact

Fact: 40% of small businesses never reopen after a natural disaster, according to the Federal Emergency Management Association. In a world with more flooding, more hurricanes, more wildfires, businesses of all sizes face increased risks of a knockout blow.

Climate is changing, and taking a devastating toll on property and business. This is physical risk—direct impacts from climate-related severe weather.

As the planet warms, the questions for every business are: what natural disaster will my business face; how bad will the damage be; how long will it take to recover; and will my business recover?

Eight of the 10 largest fires in California history have burned in the past decade, threatening the state’s more than 75,000 farms and leaving demolished structures, crops, and livestock herds in the wake. Long-term soil and smoke damage to crops has prolonged the pain. In the fires that swept through the famed Napa and Sonoma counties in the fall of 2020, grape growers contended with “smoke taint” making grapes unmarketable. California’s new climate reality has some in the wine industry asking how it can even survive.

The shift to a low-carbon economy is underway

The speed of the energy transition has implications for all businesses. Each time a state like California pledges a transition to electric vehicles, the future resale value of gasoline-powered vehicle fleets slips. Market forces and technology advances will play a role. Together with policy changes, these create transition risks for smaller businesses.

Businesses will need to be ready for stricter energy efficiency standards, carbon taxes, and emissions disclosure requirements in the future. Businesses with larger carbon footprints and no strategy to reduce them may be looking at higher costs for credit, according to some observers. Ratings agency Moody’s recently identified 13 sectors with a combined $7.2 trillion of environmental credit risk, as much as Japan’s entire GDP.

U.S. farmland has been valued at around $2.5 trillion. With climate change threatening to make certain regions less productive, some fear that lenders may not be willing to take on the risk of land losing value. This concern about “stranded assets” in various industries is attracting increased attention.

Business insurance may also become more costly, less comprehensive, or difficult to access. Insurers admit it’s already getting harder for companies to protect themselves from climate-related risks with an insurance policy.

4 Questions Every Business Should Be Asking About Climate Risk

The path forward to tackle physical and transition risks starts with answering 4 questions:

  1. What physical risks threaten my business?

    Different areas of the U.S. face different threats from climate-related natural disasters. How will climate-driven weather changes in your company’s footprint impact your business? If you’re growing fruit in the Pacific Northwest, for example, will increased water stress put your operations at risk?

  2. What transition risks does my business face?

    New climate policies will be a bigger threat to carbon- intensive businesses, and those that depend on natural resources such the oil and gas industry, where stranded assets could be a particularly large risk. Carbon disclosure requirements, carbon taxes, and cuts in subsidies to high-emitting industries are also likely to be rolled out for businesses of all sizes in the future. By thinking through transition risks now, businesses can start to get ahead of climate-related rules and regulations and reduce the potential costs of the transition to cleaner economy.

  3. How big is my company's carbon footprint?

    Check out the EPA’s simplified calculator for low-emitter businesses to measure the size of your carbon footprint. Variables to consider include the power needs of offices and warehouses, the size of your vehicle fleet, how much business travel employees do, and how you ship products. If your business has a large carbon footprint, you should expect that future climate policies will increase costs. Taking steps now to reduce your businesses’ footprint will enable you to spread out the costs of investing in green alternatives, such as electric delivery vehicles and solar panels. Reducing energy use and waste, as well as implementing other strategies to cut emissions, can also cut business costs today.

  4. How can I reduce my company's climate risk?

    Start with three documents: Your insurance plan, business continuity plan, and disaster recovery plan. If you don’t have any one of these, it may be time to develop them, and assess them in light of climate-related catastrophes and other threats to your business. Many industries have begun sharing best practices for adapting to climate change and reducing risk.

The USDA’s Climate Solutions information network provides practical information, such as cover crop guides, to help farms and ranches adapt to climate change by combating erosion. The SME Climate Hub provides tools for businesses to develop their own climate strategy—rom business planning to emissions reductions and carbon offsetting.

The future of business is clear: Companies that reduce climate risk and build resilience will be better prepared to succeed in our low-carbon future. That will be good for our planet, and good for your business’s bottom line.

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Nathan Beers Writer Bank of the West

Nathan joined Bank of the West in 2018 as a writer for technology, finance, and green businesses. On weekends he’s often out with his family exploring the California coastline.

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