Dive Brief:
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More than 3 in 4 CEOs and CFOs say their companies are underprepared for climate-related financial risks, according to the Climate Risk Survey from property insurance company FM Global, which insures property for one third of the Fortune 1000 companies, each of whom have large industrial commercial properties.
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The findings stem from a global poll of several hundred CEOs and CFOs at companies with $1 billion or more in revenue, across industries in North America, Europe and Asia Pacific. More than 8 in 10 (82%) of respondents believe their companies have somewhat to no control over climate change impacting their business.
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Just over 75% said their business is exposed to climate risk, rating floods, droughts and wildfires as most concerning. At the same time, 80% feel executive management should be held accountable for the adverse financial impact, and 66% feel the board of directors should be held accountable.
Dive Insight:
Managing climate change preparation is a distinctly CFO duty because CFOs make the big financial decisions, FM Global's Katherine Klosowski told CFO Dive in an interview Wednesday. Klosowski, who manages natural hazards and structures at FM Global, helps the group develop its technical standards on preventing flood, hurricane and wildfire damage, as well as leads projects on moving the topic of climate risk forward.
"[CFOs] can choose where to invest within their businesses, and where to divest, much more so than some other executives," she said. "FM Global works with many risk managers, and while they can make the decision to protect their company, the CFO is the one who makes the decision to divest."
Klosowski breaks down the CFO's playbook into three simple actions: understand, plan and fortify. The first step CFOs can take today is trying to understand what kind of client risk impacts their facility. This includes understanding the flood risk for different locations, and if they're in a wildfire area.
The second step is to plan and strategize, asking which locations are exposed to which types of perils. "They can also plan and strategize around what they'd do if one of those flood-prone or hurricane-prone areas were hit," she said.
Thirdly, take steps to fortify buildings to withstand hurricane damage.
"We can't control the events, but we can control the damage," Klosowski said. "Floods, hurricanes and wildfires are happening, and have been happening for centuries, and there are proven ways of engineering a facility to protect against them."
According to the study, "the findings are concerning as hurricane and wildfire seasons begin in the U.S., and the threat of flood [rises] globally, combined with the challenges the pandemic has placed on businesses," Klosowski said. "The combination of being underprepared for natural catastrophes, volatility in financial markets, and the threat of an economic recession couldn’t come at a worse time."
The survey builds upon the World Economic Forum's report from earlier this year, released just before the pandemic struck, which declared extreme weather events, plus failure of climate change mitigation and adaptation, as top risks over the next decade, she said.
"Fortunately, most losses stemming from climate-related events are preventable, and loss prevention can help preserve value and resilience," Klosowski said. "However, the challenge many companies will face is adequately preparing if stay-at-home orders remain in place," which she said could exacerbate climate-related events' impact on already-fragile bottom lines.
Klosowski doesn't believe COVID-19 has had an adverse effect on disaster planning. "In my experience, different executives tend to fall into three different camps: believers, who believe they can influence their future, non-believers, who think they’re too big to fail, and those in the middle, who think they can take action, but not quite certain of how to do it."
As a result of COVID-19, many business leaders have worked to strengthen their supply chains, and ensure their organizations are still able to meet their mission without needing to meet in person. "They want to be resilient, but may not be sure how to," Klosowski said. "They've been able to learn from COVID-19 and put measures in place."
Klosowski was surprised by the high percentage of respondents, 77%, who feel unprepared for climate change.
"This high percentage felt they had somewhat to no control over adverse financial impact," she said. "That strikes me because I know they do have the ability to control that."
From a competitive standpoint, Klosowski says, some businesses won't be able to meet customer demand during extreme weather events, which creates a hole in the market. And some other company, she said, will fill that hole, and fill in the market share.
Despite uncertainty, executives at a number of organizations announced their investments in renewable energy, sustainable business and strides towards carbon neutrality. Last year, Goldman Sachs pledged $750 billion towards fossil fuel reduction, Barclays announced a goal of zero carbon emissions by 2050, and Wells Fargo signed a multiyear solar energy deal with Shell.
Addressing climate risk gives businesses a competitive advantage, Klosowski said. "The lessons business leaders have learned from COVID-19 can be a springboard for helping them prepare for the inevitable." At FM Global, they refer to these events as not "ifs" but "whens."