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Climate Risks: How to Protect Your Assets and Ensure Sustainability
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Climate change is a reality that cannot be ignored; it is increasingly manifesting itself in extreme weather events that affect human life, the economy and the environment. In recent years, heat waves, floods, forest fires and hurricanes have become more frequent and severe, revealing the vulnerability of infrastructure and physical assets in various sectors. These phenomena force companies to invest in sustainable and resilient asset management strategies to ensure business continuity and reduce exposure to climate risks.
Figure 1: Types of risks identified by the Intergovernmental Panel on Climate Change (IPCC)1
According to Morningstar Sustainalytics - a platform that evaluates and ranks the environmental, social and governance (ESG) performance of companies and investments - climate risks are increasing significantly, leading organizations to reconsider how they manage their assets to ensure long-term resilience and sustainability. The organization has even published a report aimed at helping investors navigate the risks related to climate change and develop strategies to align their investments with the transition to a low-carbon economy.
For investors and companies, pressure to meet emissions targets, tightening regulations, political debates and the physical impacts of climate change present uncertainties and risks. However, these factors also represent opportunities to invest in solutions that can contribute to a more just and sustainable global economy. Solutions range from using resources more efficiently to developing renewable energy technology.
Mornigstar Sustainalytics "Navigating Material Climate Risks in the Global Equities Market"
Other recent studies show that exposure to climate risks results in substantial financial losses. For example, an MSCI report states that companies that fail to adapt to this reality could see the valuation of their assets fall dramatically, with negative impacts on their operations and profits.
This scenario requires companies to respond quickly and effectively in order to minimize the risks associated with climate change.
Climate and weather-related disasters have resulted in billions of dollars in losses, including damage and destruction of properties, which impact the regular operations of real estate companies and their portfolios, along with decreased asset values due to an inability to adequately underwrite properties in high-risk areas for extreme weather events. Additionally, failing to meet regulatory standards on environmental performance may prevent buildings from being sold or leased.
Mornigstar Sustainalytics "Navigating Material Climate Risks in the Global Equities Market"
The insurance, real estate and infrastructure sectors are particularly vulnerable to climate change. Assets located in areas prone to natural disasters face high risks, making them increasingly difficult to insure. The MSCI report - 2024 Sustainability and Climate Trends to Watch - shows how several insurers have abandoned high-risk areas, such as Florida and California, where the frequency and intensity of natural disasters intensifies every year. This withdrawal increases the financial responsibility of homeowners and raises doubts about the viability of real estate and infrastructure investments in these regions. This reveals how the insurance industry is reacting and adapting quickly to climate change, while also seeking to protect the sustainability of its business.
Data from the World Bank, which analyzes the impact of climate change on critical infrastructure, especially in urban and coastal areas, suggests that 70% of global infrastructure needs to be adapted to withstand more extreme climate conditions.2
In addition, the IPCC in its assessment report (AR6) stresses the importance of investments in resilient infrastructure, especially in coastal regions, to reduce failures in essential systems, such as transportation and communications, due to the increase in extreme weather events. This document also addresses risk projections and mitigation strategies to protect infrastructure from future climate threats.
Logistics and the supply chain are areas facing unique challenges due to climate risks. Rising temperatures and extreme weather events have a direct impact on worker productivity, especially in sectors that require physical labor. According to MSCI, it is estimated that productivity can decrease by up to 20% during severe heatwaves, which not only affects operational efficiency, but can also result in labor disputes and increased absenteeism due to health problems. For example, during the record heatwave in Europe in 2022, several logistics and transportation companies were forced to halt operations for safety reasons, resulting in significant delays in the supply chain.
One example can be found in the shipping industry, where Maersk has implemented measures to mitigate the impacts of climate change. The company has begun monitoring weather conditions in real time, allowing for better management of operations and a faster response to adverse events.
The impact is also felt in transportation and storage costs. One case in point is DB Schenker, which has started investing in warehouses with efficient cooling systems in regions prone to extreme heat. This technological adaptation helps to protect both goods and workers, promoting a safer and more efficient working environment. The use of IoT sensors to monitor conditions in real time has become commonplace, helping companies plan operations based on predicted weather conditions.
Agriculture and food production are other sectors facing significant challenges due to climate change. Extreme events such as droughts and floods result in compromised harvests and disruptions to supply chains.
Changes in rainfall patterns and rising temperatures directly affect agricultural production. Severe droughts and floods have reduced harvests of staple foods such as soybeans and wheat.
In addition, the complexity of global food supply chains makes it difficult to trace the origin of materials, something that has become increasingly important as new regulations are implemented to reduce deforestation and promote sustainability.
The agricultural industry is adopting technology to mitigate these risks. One example is the use of satellite monitoring to track crop health and predict weather events. Some companies already provide tools that help farmers make informed decisions about the management of their land, using real-time weather data to adjust farming practices. These innovations not only help to increase resilience, but also to comply with increasingly stringent regulations.
Physical risks are those related to damage inflicted on infrastructure and other assets, such as factories and supply-chain operations, by the increased frequency and intensity of extreme weather events, such as wildfires, floods, or hurricanes.3
A McKinsey article explores how companies adapt to climate change. The paper looks at how extreme weather events, such as droughts and floods, directly affect business performance. McKinsey suggests that climate modeling and scenario forecasting can help companies identify their regional and sectoral vulnerabilities, enabling supply chain adjustments and mitigation measures.
As physical climate risks continue to increase, it is imperative that industries take a proactive approach to managing their assets sustainably.
1. Strengthening Resilience with Adaptive Infrastructures
One of the most critical steps companies can take is to invest in adaptive infrastructures. These are designed to withstand severe weather events, reducing vulnerability to damage. Sustainalytics indicates that investing in resilient infrastructure can result in a reduction of up to 30% in operating costs in the long term, due to the reduction in the frequency and severity of damage caused by natural disasters.
Some examples:
2. Using Technology for Effective Risk Management
Technology is a powerful ally in climate risk management. Integrating tools such as artificial intelligence (AI) and the Internet of Things (IoT) into asset management can provide real-time data and predictive analysis, allowing companies to anticipate potential climate crises.
Some examples:
3. Investing in Nature-Based Solutions4
In addition to physical infrastructure, companies can reduce their exposure to climate risks by investing in nature-based solutions. These initiatives, which include reforestation and ecosystem restoration; regenerative agriculture; watershed restoration; alternative stormwater management systems; urban plantations; ecological corridors, among others, not only protect against extreme weather events, but also promote biodiversity and improve soil and water quality.
The growing threat of physical climate risks requires an urgent and well-planned response from companies. The way assets are managed needs a sustainable and resilient approach that minimizes the negative impacts of climate change. Investing in adaptive infrastructures, using advanced technologies, implementing nature-based solutions are crucial steps that companies must take to protect their investments and ensure a sustainable future.
Commitment to sustainable management practices is not just a social responsibility, but a smart strategy that can lead to a competitive advantage in the market. As investors and consumers become more aware of climate issues, companies that demonstrate leadership and responsibility in relation to sustainability will play a crucial role in the future.
Companies must therefore not only respond to climate risks, but also lead by example, promoting a business model that not only respects the environment, but is also economically viable in the long term.
Margarida Soares
Sustainability Business Developer, Nextbitt
