"Chocolate at Stake" or: How Risk Management Ignores Climate Adaptation
This part of our climate change adaptation series highlights ten reasons why climate adaptation often receives insufficient attention in many companies.
In our discussions with companies, we often hear that risk management already covers all risks comprehensively. Typically, annual risk assessments involve sending out questionnaires and asking department heads about the risks and their magnitudes (e.g., < €5 million, €5 million - €20 million, or > €20 million). The risk manager then receives over 100 responses with subjectively assessed risks. This method captures known risks but fails to account for those that only become apparent through in-depth analysis by expert professionals.
Let's consider a hypothetical chocolate example:
Imagine a multinational company based in Europe that sources cocoa from West Africa for its premium chocolates. After years of steady growth and reliable supplies, they suddenly face a massive cocoa shortage. What happened? Prolonged droughts have impacted production in their key sourcing regions. The company's European risk management had strategies for local political instability or short-term market fluctuations but overlooked the potential impacts of climate change on its supply chain. There was no Plan B for this widespread shortage. Such gaps underscore the urgency of integrating climate adaptation into traditional risk assessments.
This example, and others you might recognize from your own business, support the integration of climate change impacts into corporate risk management. However, there are reasons why this often proves challenging. Why is that? These ten (and other) obstacles vary in significance depending on the company:
1. Short-term Focus
Traditional corporate risk management focuses on immediate threats but can overlook or inadequately prioritize long-term challenges like climate change, especially when they manifest gradually or outside typical reporting cycles. IAS 37 guidelines refer to this as a "contingent liability" for which no provisions are made. Where provisions are made, the likelihood and stringency of preventive measures and risk management are significantly higher. Suitable metrics include ROCE ("Return on Capital Employed"). Several standards demand a long-term perspective (e.g., SASB, ISSB, CSRD, TCFD, GRI).
2. Lack of Awareness and Education
Not all corporate leaders and decision-makers are sufficiently informed about the specific risks that climate change poses to their operations, supply chains, or market demand. This can lead to underestimation or outright ignorance of such risks.
3. Perceived Complexity
Climate science is complex, and the long-term impacts of climate change on specific industries, geographic locations, or entire value chains can be difficult to predict with precision. This perceived complexity can deter companies from incorporating sound scientific forecasts into their risk assessments. Traditional methods often rely on historical data extrapolation, which inadequately captures exponential risks.
4. Insufficient Data and Tools
Historically, many companies lacked access to granular data or tools to model the potential impacts of climate change on their specific operations. Advances in technology, science, and data analytics have changed this, but many potential users in companies are unaware of these tools or hesitant to use them. Implementing and utilizing digital climate risk analysis solutions requires expertise, which is now readily available in the job market and through external service providers.
5. Return on Investment Focus
Investments in climate adaptation can be costly, and in the absence of clear returns, some companies prioritize other investments with more immediate, tangible ROI. Few companies use a Return on Resilience Investment ("RORI") metric, which balances the value of climate risk reduction against other investments.
6. Regulatory Environment
Until recently, there were few legal requirements compelling companies to consider climate risks. A promising development is the CSRD, which requires thousands of companies operating in the EU to assess both positive and negative impacts of climate change on their business. However, this is often seen as a regulatory exercise completed with a few expert interviews rather than a thorough examination that could reveal strategic opportunities for the business.
7. Stakeholder Pressure
Historically, shareholders and other key stakeholders have focused on corporate decarbonization, with little emphasis on climate adaptation. Growing awareness is now increasing pressure from investors, customers, and even employees to prioritize sustainable and adaptive practices.
8. Cultural and Organizational Inertia
Changing a company's risk management approach requires shifts in culture, mindset, and sometimes organizational structures. Resistance to change and inertia can act as barriers. Currently, the finance, supply chain, and sustainability departments have different priorities.
9. Misunderstanding the Scope
Some companies might believe that the impacts of climate change are limited to certain sectors (e.g., agriculture). Understanding that accelerating climate change will worsen in the coming decades and affect all areas of life is difficult to convey. This creates a universal risk requiring new approaches.
10. Externalization of Costs
Companies might believe that the costs of climate adaptation will be borne by others (governments, insurers, or society at large) and thus feel no immediate need to internalize these costs and risks. However, insurers are already adjusting policies, leading to higher prices or uninsurability in certain regions. The growing scale of billion-dollar damages presents a clear picture. SwissRe predicts annual damages by 2050 could reach up to 18% of global annual economic output.
Climate Adaptation for Future Business Security
Returning to our multinational company: The cocoa shortage not only threatened the company's profit margins but also damaged its brand reputation. Customers who had come to love their premium chocolates found empty shelves or lower product quality due to sourcing difficulties. The impacts also affected retailers, employees, and investors.
So, what is the lesson? Engaging in climate adaptation is not just about avoiding disasters; it's about ensuring that the complex network of global business—from cocoa farmers in West Africa to chocolate lovers in Berlin—remains robust and resilient. In a world increasingly defined by climate uncertainties, companies that proactively incorporate these adaptations into their risk management processes will not only protect their business operations but also gain a competitive advantage.
In the end, more than just chocolate is at stake; it is about the future resilience of global business in an ever-changing climate landscape. "The era of global warming has ended; the era of global boiling has arrived," said UN Secretary-General António Guterres. Don't let your chocolate melt!
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