Climate change causes extreme weather events across the world that endanger people’s lives and disrupt the businesses on which they depend. In Africa, for example, recurring droughts, floods and cyclones due to climate change might cause crop failures and food insecurity. As businesses make plans to mitigate climate risks such as extreme weather events, they have an opportunity to innovate with new business models and demonstrate leadership by implementing more sustainable practices. 

What is climate risk? 

To put it simply, climate risk is the potential for the effects of climate change to disrupt our current economic and social structures.  

The United States saw 25 climate disaster events in 2023 with losses of more than USD 1 billion each. These events included floods, severe storms and a drought. 

These kinds of disruptive events might be temporary or result in long-term damage to infrastructure or buildings. Power shutdowns might occur across the grid, and supply chains might face interruptions. Substantial repair costs might arise, particularly impacting insurance companies. 

In addition to extreme weather risks, there can be chronic climate risks, such as rising sea levels and sustained higher temperatures. These risks can make it difficult or impossible for organizations to operate in affected locations. 

Why should businesses act now on climate change? 

Climate change exposes organizations across a range of sectors to operational and financial risks. Whether it be through asset and infrastructure damage, operational impact, displacement or logistical delays, climate risk threatens essentially every business.   

Dealing with these problems is difficult and expensive. When an extreme weather event occurs, a company might need to change its infrastructure and processes suddenly, either for the short term or permanently. There are likely to be direct expenses, along with missed opportunities and lost business. To best prepare, organizations need to develop a climate risk strategy. 

In addition, companies are under pressure from their customers, employees and shareholders to be more sustainable. People increasingly view sustainability as a crucial element in corporate and social responsibility initiatives. Organizations must reduce their impact on the planet by driving down energy consumption and waste. They also need to ensure they can continue to operate in the face of climate risk. In some business sectors, such as financial services, fast-moving consumer goods and healthcare, business interruptions can have a significant detrimental impact on daily life. 

Regulations help shareholders, employees and business partners understand the impact a company has on the environment: 

• The US Securities and Exchange Commission (SEC) has new rules mandating certain disclosures for climate-related risks as well as reporting on Scope 1 and Scope 2 greenhouse gas emissions for some companies.
• In the EU, the Corporate Sustainability Reporting Directive (CSRD) came into force in January 2023, strengthening the rules around the environmental information companies must disclose. 

Leaders must evaluate the types of climate hazards their organizations should prepare for and identify the locations most at risk from climate change. They should also assess how severe the financial impact of these climate hazards might be on their organizations.  

Apart from operational and financial considerations, there’s a moral obligation. Businesses that have the power to help address the climate emergency should do so. 

How can businesses adapt and maintain resiliency against climate risk?  

As organizations shift to a lower-carbon economy, they might be able to save costs by reducing the use of energy, materials and water. New low-emission products and services might also help a company compete by winning more sales from environmentally conscious buyers. By strengthening their resilience against climate risks (for example, introducing redundancy in supply chains), organizations can also be more resilient against other risks. 

Artificial intelligence (AI) can play an important role in many solutions for tackling climate risk. In India, for example, the states of Uttar Pradesh and Bihar are in a region of extreme summers and winters. Their state governments must order electricity for their citizens in advance, and they used to predict demand manually by using spreadsheets. Predicting energy consumption is closely linked to weather patterns. Therefore, the states worked with Mercados EMI, a consultancy firm specializing in the energy sector, to build an AI-based demand forecasting system that uses weather pattern data and electricity demand data. 

In the US, the Texas Department of Agriculture identified climate change as a potential threat to the state’s food supply. The state experienced one of its driest years on record in 2022. Smallholder farmers didn’t know how much water to use for specific crops. IBM and Texas A&M AgriLife developed a tool that uses low-cost soil sensors and weather forecast data from the IBM^® Environmental Intelligence Suite together with crop-specific information. The solution helps farmers avoid overwatering and underwatering. 

In Costa Rica, Ecuador, Colombia, Chile and Argentina, over 1,300 farmers are piloting a mobile app that gives farmers training on using weather data, agronomic data and carbon footprint calculations to adapt to climate change.  

These stories show that organizations can use climate data and AI to improve their decision-making and their resilience against climate risks.  

With climate change posing a significant threat to many businesses, and regulatory change intensifying the pressure to mitigate those risks, now is the time for organizations to draw up a climate risk adaptation strategy. For more information, visit our Climate risks insights page.