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Governments around the world are taking action in response to a number of climate events, including requiring businesses to report on climate-related financial risks. These events have prompted greater government action, but should also serve as a wake-up call for businesses to protect shareholder value and growth and stability at the top and bottom line.
Extreme weather events in September caused a state of emergency for local governments and businesses on the West and East coasts of the US. More than 525,000 homes and businesses were at risk of losing power in California after a record heat wave and heavy rainfall in New York caused major disruptions to the city’s drainage, transportation and infrastructure systems.
Successive government actions have signaled that the world’s largest economy is taking climate change seriously. First, the Securities and Exchange Commission (SEC) proposed an environmental financial disclosure rule. Most recently, President Biden’s Inflation Reduction Act marked historic investments in climate protection, including household tax credits to offset energy costs, investments in clean energy generation, and corporate and household tax credits to encourage reduced carbon emissions.
Manufacturers must more urgently address decarbonization and climate resilience. The manufacturing industry consumes 54 percent of the world’s energy sources and is responsible for one fifth of carbon emissions. Although Net Zero has spurred action by many manufacturers, many fail to realize that Net Zero alone is not enough. Manufacturers need an adaptation and mitigation strategy to protect their physical assets from accelerated climate events.
Balancing
The manufacturing industry is highly vulnerable to climate change due to its reliance on supply chains, built assets, as well as natural and human capital. Capital damage from river flooding could double by 2030 and quadruple by 2050, according to a 2020 McKinsey Global Institute report.
However, many producers have been slow to adopt measures to reduce physical climate risk. A recent survey reveals that nine out of ten manufacturing climate decision makers report that extreme weather events have already affected their company’s physical assets in the past five years. However, just over half (52 percent) said their company has an active plan to modify physical assets or related processes to mitigate damage from an unforeseen climate event.
As part of their adaptation strategies, manufacturers also want to work with more sustainable suppliers and find regions or locations that are less exposed to climate hazards. In addition, many manufacturers request emissions data from their suppliers. McKinsey estimates that downstream players in the supply chain could lose up to a third of their annual revenue if a climate event disrupts supply. Additionally, they note that a well-prepared company is likely to fare better, losing only about five percent of revenue under similar circumstances.
Climate intelligence that relies on a single global asset catalog and petabytes of global climate data provides a single view of climate risk on physical assets across the supply chain – a view that can be seen and shared by all stakeholders to drive joint action to reduce risk. Armed with this new business intelligence to manage climate risk at the asset level, companies across industries are accelerating adaptation planning and screening supply chain risks. For example, if screening reveals a high risk score for a particular supplier over the next five to ten years, a manufacturer can use this intelligence to suggest individual and joint investments in resilience efforts to strengthen physical assets critical to supply chain continuity.
With their heavy reliance on manufacturing facilities and robust supply chains, manufacturers must be at the forefront of physical climate risk management. Importantly, even as governments around the world are expected to enact more policies and regulations to address climate change, manufacturers must not wait to act. Climate represents a loss of value for shareholders and presents security issues for businesses and communities.
Karan Chopra is the CEO of Cervest, a climate intelligence (CI) company.
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