Climate change, natural hazards and biodiversity loss are interlinked. To meet these challenges effectively, we need to build resilience.
- This is a matter of survival and competitiveness for all businesses today. And there are three key areas to consider for your climate vulnerability analysis to be accurate," says Lina Molin, Ecogain's climate adaptation expert.
Climate adaptation is the ability to adapt and build resilience to the risks of climate change. In Sweden, we have already begun to see how droughts and heavy rainfall can affect nature, businesses and entire communities. Many other countries have been dealing with these problems for a long time, but now Swedish companies are also starting to incorporate climate change risk management into their business planning.
The scale of the impacts depends very much on how well we have prepared, and strengthening the capacity to analyze different types of climate risks and take action to address the challenges is increasingly time-critical.
Climate, nature and biodiversity are linked
The link between climate change, natural hazards and biodiversity loss is clearly visible in the changing climate. An increase in average temperature can have such a large impact on species' habitats that they have to move, or risk the disappearance of entire populations.
- "Nature, climate and biodiversity are closely linked in complex ecosystems. Ecosystems can withstand some stresses, but some are on the verge of total system collapse," says Lina Molin.
For businesses, preventing risks becomes a matter of survival and competitiveness. This requires good insight and planning.
Look at both acute and long-term risks
There are both immediate and long-term risks to consider. The most obvious are physical risks, such as landslides, floods and fires, which can have a significant negative impact on a company's operations. This is particularly acute for operators with activities in several countries that are also affected by extreme weather events.
Other risks are linked to the era of transition we live in, with legal requirements, reporting and political decisions. Those required to report under the CSRD should include climate-related risks. The easiest way to do this is by following the TCFD recommendations*, which can help companies manage financial and regulatory risks.
These risks affect the way investors and insurers, for example, relate to the company and view capital flows and financial stability.
Banks and insurance companies are also expected to include climate-related risks in their accounts. Insurance companies are required to identify and assess sustainability risks, including climate risks, and take them into account in the assessment of their overall solvency requirement in the Orsa report**. The European Central Bank (ECB) has included climate-related and environmental risks in the SSM's*** risk map for two consecutive years. These are seen as risk drivers for euro area banks.
Three key areas for climate vulnerability analysis
Companies therefore need to start their climate adaptation work now, describing how climate-related market changes could affect their operations and financial performance. A successful climate risk analysis needs to take into account:
- IDENTIFYING RISKS AND OPPORTUNITIES
As a first step, historical and future challenges need to be outlined. Then the effects of climate change that may affect the business are described, often using different climate scenarios such as RCP 4.5 and RCP 8.5.
An assessment is made of the company's ability to deal with extreme weather, physical damage to properties, loss of biodiversity and other long-term effects that may come from countries other than Sweden.
It also analyzes upcoming challenges to the company's long-term sustainability and profitability. This may involve looking at insurance costs, loss of assets, disruptions to production and costs of adapting to new regulatory requirements.
- PROBABILITY AND IMPACT ASSESSMENT
Once the risks have been described based on given climate scenarios, an analysis of the impact of climate risks is made using a probability and impact assessment. Such an assessment is often done through a risk matrix that indicates where and by what the company is most affected.
It is important to assess each identified risk from a financial, operational, legal and market perspective. The impact assessment should analyze both the direct and indirect effects of climate risks on business operations.
Once the risk matrix is completed, a more detailed summary of the risks identified and a prioritization list will be prepared.
- ACTION WITH CLEAR MANAGEMENT AND MONITORING
Understanding the likelihood and consequences of climate-related events helps prioritize actions that can reduce risk. It also allows for more informed decisions on how to allocate resources for prevention and preparedness planning.
In addition to the long-term sustainability of measures, there are two additional points to consider in planning:
- The measure should ideally be multifunctional and address multiple risks.
- The measure should ideally reduce greenhouse gas emissions and contribute to enhancing natural environments and biodiversity.
For action to be successful, it must be monitored and evaluated. What emerges from the evaluation is invaluable for continuing prevention work.
Don't forget the supply chains
When assessing risks, it is important for companies to carefully map their upstream and downstream supply chain activities. This involves identifying and assessing any vulnerabilities that could be affected by climate change.
It looks at where suppliers are located geographically and how well they can manage and recover from potential climate-related problems. It is also important to consider what the suppliers themselves are doing to be sustainable and how they manage risks. For companies that source their raw materials or components from areas that are particularly vulnerable to climate impacts, this analysis is particularly important.
- Although we see a clear link between in-depth analysis around the company's operations and a successful climate vulnerability analysis, I would like to remind you of the importance of starting simple. Start with an overall picture to get the right people involved and then expand gradually. Then we can dive into value chains and the difference between how climate change affects the business nationally and later transnationally," says Lina Molin.
Explanations and references in the text
* The international organization The Financial Stability Board (FSB) has announced that work on the TCFD has been completed. At the same time, the FSB announces that "entities applying IFRS S1 General Requirements for Disclosures of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures will comply with the TCFD recommendations as the recommendations are fully incorporated into the ISSB standards"
Here is a comparison of IFRS S2 Climate-related disclosures with the TCFD recommendations.
Here is a report from Adaptation Without Borders on transnational risks linked to climate change.
** Since the EU Solvency 2 regulation was amended in August 2022.
*** Single supervisory mechanism.
Ecogain offers climate adaptation services
Climate vulnerability analysis: Here we combine climate scenarios and climate risks to assess vulnerabilities and future challenges. We investigate how the company's operations are affected by physical and national climate risks through risk matrices and literature reviews. This can be linked, for example, to real estate, land use, production, transportation, infrastructure, material use and more. We also have the opportunity to analyze how the company is affected by transnational risks. We weigh different climate scenarios against each other and help present this as a basis for the CSRD report. The field is very broad and we always tailor our analyses to suit the company in question. Our climate vulnerability analyses follow TCFD and IFRS recommendations for climate risk reporting.
Action planning: We help you develop appropriate measures related to climate risk mitigation, natural hazards and biodiversity. This could include, for example, maintaining and creating natural ecosystem services that divert and retain large amounts of water and/or regulate temperature.
Project management: We support you all the way through the climate adaptation process, from internal resource planning to mapping.
Lectures and workshops: If you need to update your knowledge about climate adaptation and get more momentum in your work, we will tailor a program to your organization.
