How do you educate your organization to ensure an aligned Risk Management approach to climate risks?
Other Risk Managers are probably asking themselves how to sell this idea strategically to stakeholders within their organizations. Climate risks should be managed like any other business risk. I see the solution to managing climate risks as a three-pronged puzzle – 1. Prioritizing effective loss prevention to critical infrastructure; 2. Building business resiliency; and 3. Complementing loss prevention and resiliency efforts with risk transfer & insurance products:
1. Loss prevention is critical.
Given the frequency and severity of extreme weather events, this topic has become increasingly important to risk managers. At LVMH North America, we are proud to support the LVMH Group and its 75+ Maisons across Canada and the United States, a region where LVMH employs 40,000 employees, including a few Maisons headquartered in the U.S. Just last month, we presented to CFOs and finance leaders across our region to educate them on the impact climate risk and extreme weather events can have on their business. It is important for risk managers to help their organizations quantify the impact of climate risks and what influence extreme weather can have on their operations, both directly and indirectly. This information and data can help Risk Managers and their stakeholders prioritize risk improvements to critical infrastructure and assets. Also, understanding what specific hazard zones (flood, hurricane, wind, wildfire, etc.) your locations are exposed to will help to provide clarity on potential risks you are faced with and help to articulate to stakeholders the potential impact climate risks have on critical operations in those zones. Even if you lease a property rather than own, you can still ask the right questions of your landlords. It’s important to work with operations teams and landlords to understand risk control measures being taken on key leased assets. Are roofs and windows hurricane-proof, is sway bracing used for buildings in EQ zones, review flood elevation maps when selecting new strategic warehouse or distribution locations, etc. Knowing the answers to these questions will fill in the gaps that can prevent Risk Managers and their stakeholders from seeing the full picture of risk to your organization.
2. Resiliency efforts should involve actions aimed at minimizing and recovering from the impact of climate risks.
We know loss and damage from climate risk is inevitable, but focus should be on managing and mitigating the risk. Business resiliency is more important than ever, especially since COVID. Proactive planning is truly an investment and will reduce the disaster's economic impact on the business. Emergency Response Plan and Business Continuity Plans are critical for resiliency efforts and businesses should make plans that address specific hazards for their location and continually test and update those plans. Resiliency efforts can also focus on adapting to the changing climate, which can include implementing infrastructure improvements to withstand extreme weather events.
3. Insurance is only part of the risk management solution. Loss prevention & loss control are complementary.
Lastly, risk managers should work to determine how climate risk can be financed in the current market. There are several alternative risk transfer products, such as parametric insurance and cat bonds, which are filling the gap traditional insurance is creating. Unfortunately, insurance availability and pricing for traditional insurance will become more restrictive as insurance companies continue to take huge Nat Cat losses driven by extreme weather events. Insurance is only one piece of the puzzle, but all elements of a Climate Risk Management model – prevention, resiliency, and insurance and risk transfer should be built into businesses' short and long-term business strategies.