COVID-19 demonstrates the catastrophe that occurs when we fail to prepare for known risks. Learning from the pandemic will ready your business for the bigger challenge: climate change.
For years, the WHO warned of the risk of a serious pandemic, but businesses and governments failed to prepare. Now the world economy is reeling. In a report for KPMG, Simon Weaver, Bridget Beals and Liz Harrowell examine the reasons for this lack of preparedness, and suggest ways to apply the lessons of COVID-19 to help mitigate the economic risks of climate change.
Why businesses are underprepared
There are four key reasons why businesses were underprepared for the onslaught of COVID-19:
1. Humans underestimate risk. Risks that appear too big, too complex or fall outside a 15-40% probability of occurring are often overlooked. Pre-emptive action is rare, particularly when financial risks are indirect and difficult to quantify.
Climate change impacts are also slow to materialise and often too complex to appreciate, making inaction highly probable. The Bank of England estimates that £20 trillion of assets could be wiped out by climate-related events if business inaction continues.
2. Risk networks amplify impacts. “The traditional risk models often used in crisis response will typically focus on the probability and impact of individual risks, but in the COVID-19 crisis we are seeing that there are much broader indirect environmental and social consequences.”
Heightened global connectivity magnifies the consequences of global crises. Indirect impacts trigger systemic consequences at rapid velocity. Climate change has highly significant risk networks. Without mitigation strategies, consequences of climate change will wreak havoc.
3. Businesses are unaware of their vulnerabilities. COVID-19 has demonstrated how vulnerable global supply chains are to any sort of disruption. Climate change is set to have macroeconomic impacts that dwarf those of the pandemic. Without knowledge of organisational weaknesses, companies are highly vulnerable.
4. No response plans. Unprepared organisations fail to act swiftly and suffer in the long term. South Korea, armed with a pandemic response plan, acted rapidly and weathered the initial challenges of COVID-19 well, while the USA dithered and suffered a much larger outbreak. Planning for a range of future scenarios is essential in order to face an uncertain clime future.
Lessons for business
“More robust planning to manage climate-related impacts is crucial to prevent the systemic impacts of COVID-19 happening again.” The same applies to climate change, which is already having an impact, and will only accelerate. Act now to:
- Analyse risks. Understanding how climate change threatens your business is essential. Use the guidance set out in the Task Force on Climate Related Disclosures to measure your company’s ability to respond to climate risks.
- Locate vulnerabilities. Identify the areas of your business exposed to direct and indirect climate-related risks. Understand the weaknesses in your supply chain and plan how to respond proportionately and decisively if disruption occurs.
- Develop climate response plans. Preparing a climate response plan is key to protecting your business from climate-related shocks. Adopt long-term strategies that tackle climate risks head on and prepare to rapidly adapt in the face of a crisis.
- Make changes today. Climate change is highly likely to feature among your company’s principal risks. Integrate climate risk mitigation into your strategies today, to protect your business from damage in the future.
Now is the time to restructure your business to endure the high-impact risks of climate change. Learn from COVID-19 in order to protect the future financial stability of your company.