MANAGEMENT & ACCOUNTING

Managing Climate Change Risk

Patrick Ow
Climate change is one of the major environmental challenges of our time. It is a significant
emerging global risk. Organisations, if they haven’t done so already, should begin to
account for it in their strategic and operational planning, and develop plans to mitigate
and / or adapt to any potential climate change and the social impacts (e.g. effect of climate
change on employee well-being) it may have on the continuity of business and services. The
challenge for both private and public organisations is assessing as quickly as possible the
impact of climate change upon their operations and adapting to climate change.

T
he definition of climate change
is ‘a change of climate which is
attributed directly or indirectly
to human activity that alters
the composition of the global atmosphere
and which is in addition to natural climate
variability observed over comparable time
periods’1.
Examples of how climate change (or
climate variables) could affect climate ex- x
tremes are:
„ More frequent very hot days.
„ More frequent and longer droughts.
„ More frequent and larger floods.
„ More frequent and more intense heavy
rains.
„ More intense tropical cyclones.
„ More intense storms.
„ Higher peak wind speeds.
„ Higher storm surges.
With these climate extremes come the
risks associated with climate change:
„ Operational risk — disruption of opera- a
tions due to inability of suppliers to pro-
vide services or when staff are unable
to work due to floods or transportation
shut down.
continue operating. Because the risk of cli-
Figure 1 Chain of Consequence
mate change does not arise directly from
changes to climate and climate related
variables, there is a chain of consequences
that we all need to understand (as shown
in the diagram) in order for us to manage
the impact of climate change.
As such, the challenge for organisa- a
tions is therefore to fully comprehend and
understand the impact of these climate
variables and potential change to these
climate variables on their organisation and
its operations, which may create risks to
the organisation.
hxTHECHALLENGEFOR
ORGANISATIONSISTOFULLY
„ Regulatory risk — regulation of green-
COMPREHENDANDUNDERSTAND
house gas emissions, ensuing compli- THEIMPACTOFTHESECLIMATE
ance costs and amended building laws
to cater to possible climate change. VARIABLESANDPOTENTIAL
„ Litigation risk — costs resulting from CHANGETOTHESECLIMATE
“climate litigation” and lack of case law.
„ Capital risk — inability to raise capital
VARIABLESONTHEIR
due to uncertainty. ORGANISATIONANDITS
„ Competitive risk — loss of economic op-
portunity.
OPERATIONSWHICHMAYCREATE
„ Insurance risk — increased premiums The risk of climate change to your organ- RISKSTOTHEORGANISATIONv
and/or uninsurable due to uncertainty isation, for instance, is to its reputation as a
of the impact of climate change on your-
r reliable provider of products or services or
its ability to meet its statutory mandate or 1 United Nations Framework Convention on Climate
operations. Change (UNFCCC).

ACCOUNTANTS TODAY s*ANUARY 

Managing Climate Change Risk

As a starting point, we are able to map the possible impact of climate change based on locating, which in turn triggers new issues.
existing knowledge. Organisations located farther inland may,
likewise, be forced to rethink their normal
Impacts Heatwaves Floods
continuity plans when faced with more fre-
Health sIncreased pressure on healthcare system,s2ESULTINDEGRADATIONOF quent or severe storms or drought.
Impacts admissions requiring additional staff and health and loss of life. What if a change in climate leads to
INCREASEDDEMANDFORMEDICALSUPPLIES s)NCREASEDTRAUMAAND changes in electricity production and use?
s-OREFIRESINDRYAREASLEADINGTO ASSOCIATEDHUMANMISERY If demand for cooling drives up electricity
REDUCTIONINAIRQUALITYANDINCREASING s2ISINGSEALEVELSMAY prices or causes supply shortages, what
respiratory problems for the young and increase the vulnerability will the impact be on your ability to oper-
old, and those with asthma. of coastal infrastructure. ate? Or if the electricity distribution infra-
s$ECREASEDWATERQUALITYANDAVAILABILITY structure is affected by prolonged floods
Facility s/VERCROWDINGOFHEALTHCAREFACILITIESBY s0HYSICALFACILITIESARE and storms? Or if uprooted trees destroy
Impacts people not needing medical treatment, flooded. electrical power lines?
BUTLOOKINGFORAIR CONDITIONEDAREAS s)NCREASEDPRESSUREON Risk management is generally recog-
s)NCREASEDPEAKDEMANDSONELECTRICAL DISASTERRELIEFSYSTEMS nised as a starting point for addressing
POWERGENERATIONANDDISTRIBUTION s%VACUATIONOFHEALTHCARE climate related vulnerabilities. For organi-
systems will challenge system reliability facilities may be necessary sations to fully understand the risks posed
and availability. for oxygen-dependent by climate change and their potential im-
s#OMPUTERSANDELECTRONICSFAILDUETO PATIENTS pacts, and whether those climate risks and
OVERHEATING s%LECTRICALPOWEROUTAGES impacts are near-term and sudden, versus
s4RANSPORTSYSTEMSAFFECTEDBYHEAT MAYBEUNAVOIDABLE long-term and gradual, a comprehensive
related expansion of railway lines and risk assessment should be developed to
steel bridges, and other associated rank climate change risks by likelihood
damage to roadways. and consequences as part of your risk
management and business continuity man-
agement processes. Risk management
We need to fully understand the potential means by which climate risk could directly or standards like AS/NZS 4360 or draft ISO
indirectly affect your operations, resources, reputations, and financial position. Any identi- 31000 will assist in this process.
fication and assessment of climate risk must be conducted within your organisation’s over- One of your strategies to mitigate climate
arching risk management framework and processes. These set out the parameters and change risk may be to have in place robust
evaluation criteria by which we evaluate risk. and well-tested business continuity plans
We also need to determine how climate change risk management will be integrated with that include measures to minimise opera-
other management processes, like business continuity management and supply chain man- tional disruption due to climate change.
agement. An organisation that has a fully integrated risk management system will have This requires your organisation to assess
skilled resources that can be applied to climate change risk management and many person- the potential for climate change to disrupt
nel will be familiar with the general workings of a typical risk management process. or otherwise affect your operations as an
The questions we need to ask are these: integral part of your risk assessment. It is
1 What are the possible types of climate variables (e.g. heatwaves, flood, etc) that not as a separate exercise but as an inte-
would create a change in climate variables (e.g. hot days)? grated risk management exercise.
2 What are the potential impacts (e.g. higher electricity demand for cooling) that Climate change may also affect the avail-
these climate changes have upon your operation, ser vice or product offering and ability of your staff to manage your opera-
physical infrastructure? tions. As part of your business and service
3 How will new climate change regulations impact or affect our operations? continuity management programme, ap-
4 Will our continuity plans work in the event of a change in climate? propriate continuity plans need to be put
5 Assess what additional risks climate change presents to your supply chain, ser v- in place to ensure that there are sufficient
ice deliver y and operational management. For example, ask the following: staff back-up on key tasks to be performed,
where practical.
6 Will regulations affect the ability of any suppliers (e.g. energy suppliers) to pro-
It is recommended that six impact sce-
vide materials or ser vices to your operations? Could they raise their price?
narios be considered when developing
7 Will their ser vice deliver y be affected?
your climate risk mitigating strategies. Do
8 Will our operations be substantially changed as a result of these changes?
not consider the cause. Rather, consider
Climate change will have an impact on your business and service continuity planning the impact if they should occur.
For example, an organisation faced with repeated battering from storm after storm, or
1 Failure of critical, time-sensitive serv-
with water shortages, a rise in sea level, and/or other difficulties, may need to consider re-
ices.

 ACCOUNTANTS TODAY s*ANUARY

 Managing Climate Change Risk

2 Surge in service demand. Impact

3 Denial of access to premises. Scenarios Possible Strategies for Each Impact Scenario
Failure of s$EVELOPINVENTORIESOFKEYSERVICESRESOURCESANDDETAILSOFHOWTORECOVER
4 Shortage of staff. Critical/ these.
Utility s0RE
DETERMINEIMMEDIATEALTERNATIVESOURCESORINPUTTOFACILITIES
5 Failure of technology/system. Services s0RE
ARRANGEPOWERBACK
UPGENERATORSONSTAND
BY
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6 Failure of supply chain, key supplier/ s$ETERMINEWHATPRIMARYANDALTERNATECOMMUNICATIONSYSTEMSAREREQUIRED
partner. s$OCUMENTEDMANUALPROCEDURES
Surge in s$EVELOPINVENTORIESOFKEYSERVICESRESOURCESANDDETAILSOFHOWTORECOVER
Your climate risk strategic options may Service these.
include, but are not limited to: Demand s0RE
ESTABLISHMEMORANDAOFUNDERSTANDINGRECIPROCALMUTUALAIDAGREEMENTS
with strategic partners to assist in surge in demand, especially with respect to
1 Process transfer or relocation — in- cost and supply chain.
volves transfer of critical and/or time s$ETERMINERECIPROCALARRANGEMENTSWITHOTHERORGANISATIONS
s#ROSSTRAININGOFSTAFF
sensitive activities either internally (to
s$ETERMINEWHICHKEYSTAFFISREQUIREDFORSURGEINSERVICEDEMAND
another part or location of your organi- s$ETERMINESTAFFINGLEVELSFORCOPINGWITHSURGEINSERVICEDEMAND
sation) or externally (to a third party
location), independently or through a
reciprocal or mutual aid agreement.
Denial of
2 Mutual aid agreement or arrangement Access to
Premises
s$ETERMINEMANUALPROCEDURESWORKAROUNDIFTECHNOLOGYSYSTEMSINFRASTRUC-
ture fails (long term and short term).
s$OCUMENTEDMANUALPROCEDURES
s$EVELOPINVENTORIESOFKEYSERVICESRESOURCESANDDETAILSOFHOWTORECOVER-
these.
s0RE
ARRANGEALTERNATIVEOPERATINGLOCATIONWITHINANDEXTERNALTOORGANISATION
for sharing resources, services and in-
s$ETERMINERECIPROCALARRANGEMENTSWITHOTHERORGANISATIONS
frastructure. s$ETERMINEPRIMARYANDALTERNATELOCATIONSYOUCANOPERATEFROMINTHESHORT-
term and for the longer term.
3 Temporary or manual workaround — s$ETERMINEDOCUMENTATIONRECORDSESSENTIALINCARRYINGOUTYOURKEYFUNC-
as an alternative to transferring or relo- tions, both in primary and alternate locations.
cating a process, it might be feasible to
adopt a different way of working which
nonetheless provides the same, or
similar, but acceptable, end result, es-
pecially in the short to medium term.
NOTICE
4 Change, suspend or terminate serv-
ices, function or processes — provided
there is no conflict with your organisa-
tion’s key objectives, statutory compli-
ance and stakeholder expectations.
5 Insurance for financial compensation
for losses, used in combination with
ARRANGEALTERNATIVEDATACENTREWITHEXTERNALPARTIES
other strategies.
UPDATAOFF
WORKSITELOCATION
We are therefore able to develop strate-
SETUPALTERNATELOCATIONSWITHINORGANISATION
s$ETERMINEMANUALPROCEDURESWORKAROUNDIFINFRASTRUCTUREFAILS
s$OCUMENTEDMANUALPROCEDURES
Shortage s$EVELOPPROCEDURESTOINFORMUNIONS
s$ETERMINERECIPROCALARRANGEMENTSWITHOTHERORGANISATIONS
of Staff
s#ROSSTRAININGOFSTAFF
s$RAWUPLISTOFTEMPORARYSTAFFAVAILABLEATSHORT
s$ETERMINEWHICHKEYSTAFFAREREQUIREDFORKEYCRITICALFUNCTIONSSERVICES
s$ETERMINEMINIMUMSTAFFINGLEVELSFORKEYCRITICALFUNCTIONSSERVICES
s$OCUMENTEDMANUALPROCEDURESWORKAROUNDS
s$EVELOPSUCCESSIONPLANSANDJOBSHARINGARRANGEMENTS
s$OCUMENTEDMANUALPROCEDURES
Failure of s$EVELOPINVENTORIESOFTECHNOLOGYSYSTEMSEQUIPMENTRESOURCESANDDETAILS
Technology of how to recover these.
s$ETERMINESINGLEPOINTSOFFAILURES
s$ETERMINEDEPENDENCIESASSOCIATEDWITHRECOVERYOFTECHNOLOGY
s$ETERMINERECIPROCALARRANGEMENTSWITHOTHERORGANISATIONS
s0RE
s+EEPBACK
s0RE
gies for each of the six impact scenarios,
as shown on the right.
Organisations have no choice but to
manage climate change risk within the con-
s$ETERMINEAVAILABILITYOFALTERNATEEQUIPMENTRESOURCESINTHEEVENTOFAN
incident/disruption/emergency.
s$ETERMINEWHICHKEYSTAFFAREREQUIREDTORESTOREFAILURESOFTECHNOLOGY
s$ETERMINEWHICHKEYTECHNOLOGYISREQUIREDTOCARRYOUTTHETECHNOLOGY
services.
text of their existing risk management and
business continuity management frame- Failure of
works and processes. Climate change is Supply
Chain, Key
real and it is here to stay. If your organisa-
Supplier/
ESTABLISHMEMORANDAOFUNDERSTANDING
tion does not have these two management Partner
frameworks in place, then your ability to
mitigate the impact of climate change risk
s$ETERMINEMANUALPROCEDURESWORKAROUNDIFTECHNOLOGYSYSTEMSFAIL
s$OCUMENTEDMANUALPROCEDURES
s0ERFORMPROCESSMAPPINGANDDETERMINESINGLEPOINTSOFFAILURESANDDEPEND-
encies.
s)NVENTORIESOFKEYSUPPLIERSANDDETAILSOFHOWTORECOVERTHESE
s5NDERSTANDYOURSUPPLYCHAINANDPRE
with suppliers/partners, including pre-agreed service levels, response times,
and costs.
s5NDERSTANDYOURCONTRACTUALOBLIGATIONSTOPURCHASEORPROVIDESERVICESDURING
a crisis/emergency.
will be substantially diminished. Manag- s$ETERMINEAVAILABILITYOFALTERNATEEQUIPMENTRESOURCESINTHEEVENTOFAN
ing climate change risk also calls for inno- incident/disruption/emergency.
vative approaches and management com-
mitment. AT
Contact the author at patrickow@gmail.com
ACCOUNTANTS TODAY s*ANUARY
s$ETERMINEMANUALPROCEDURESWORKAROUNDIFSUPPLYCHAINFAILS
s$ETERMINEALTERNATIVECONTRACTORSSUPPLIERS
s-INIMISERELIANCEONSINGLESOURCEDCONTRACTORSUPPLIER
s%NSURETHATCONTRACTORSSUPPLIERSHAVECONTINGENCYPLANSINPLACE
s$OCUMENTEDMANUALPROCEDURES