Building resilience in the face of uncertainty

With around 60 per cent of the world’s GDP is subject to proposed or mandatory climate-related disclosures, the increasing frequency and severity of extreme weather events due to climate change are redefining the role of directors in ensuring organisational resilience.

Just as the introduction of the Health and Safety at Work Act 2015 brought about a seismic shift in directors’ responsibilities, the devastating Cyclone Gabrielle in 2023 serves as a stark reminder that physical climate risk is a present reality. As the captains of their corporate ships, directors must navigate these turbulent waters and steer their organisations towards a more resilient future.

Organisations are increasingly exposed to the physical risks associated with extreme weather events, such as flooding, cyclones and droughts. These risks can have a significant impact on assets, operations and supply chains, leading to increased costs, reduced productivity and potential reputational damage. 

Even if you can keep the factory floors high and dry, the increased frequency and severity of extreme weather events can lead to prolonged business interruption and downtime. Directors must recognise that physical climate risk is a present reality that requires immediate attention and action.

Entering a new era of risk understanding

As the costs of natural hazards continue to rise, the traditional insurance market is fundamentally transforming. Insurers are not merely adjusting premiums, they are completely reassessing their exposure to physical climate risk, sometimes withdrawing from certain markets entirely. 

Directors must now navigate a landscape where self-insurance and partial risk retention are becoming necessary components of a comprehensive risk management strategy. This requires boards to develop a deeper understanding of their organisation’s specific risk profile. 

Ensuring organisational resilience in this new era demands that directors actively question the assumptions underlying their current insurance arrangements and prepare for a future in which understanding and quantifying your own climate risk exposure becomes a core governance responsibility.

Navigating physical risk governance

To effectively manage physical climate risk, directors must adopt a proactive and holistic approach to risk governance. This requires distinguishing between direct risks (affecting owned assets and operations) and indirect risks (impacting supply chains, supporting utility infrastructures, and customers). Both categories demand rigorous assessment. Platforms are available to provide specialised tools to quantify each dimension precisely.

Directors must ensure physical climate risk is integrated into the organisation’s risk framework with clear lines of accountability. The quality of underlying hazard data significantly impacts assessment accuracy. Urban Intelligence has documented cases where firms understated portfolio exposure by over 50 per cent when using generalised ‘global models’ in place of high-quality local hazard models. This underscores why directors must question methodological assumptions and data quality in physical risk assessments.

Risk doesn’t stand still in a changing environment, meaning effective governance requires investing in appropriate forecasting and monitoring technologies. This may include interactive spatial dashboards for visualising multiple scenarios and timeframes, and developing adaptive strategies that account for both direct operational impacts and indirect supply chain vulnerabilities.

Building resilience in the face of uncertainty

Directors must guide their organisations toward strategies to reduce exposure and improve their ability to withstand extreme weather events. Research-backed approaches transform complex risk information into actionable insights through systematic processes that incorporate evolving data and methods.

Leading organisations are adopting tools that combine risk analytics with intuitive visualisation to transform how they understand and respond to climate risks. 

To fulfil their governance responsibilities effectively, directors should regularly ask these questions.

Asset and operations assessment

• Have we mapped our critical assets against multiple climate hazards and timeframes?
• What percentage of our operations could be directly vs indirectly disrupted by a one-in-100-year event today versus in 2050?
• Which specific sites or facilities present our greatest exposure, and what targeted adaptations would address these?

Financial resilience

• How are our insurance premiums trending, and what specific climate risks are driving these changes?
• What is our financial exposure if key sites become uninsurable within the next decade?
• Have we quantified the cost-benefit of potential adaptation measures compared to the ‘do nothing’ scenario?

Supply chain and dependencies

• Have we assessed the climate vulnerability of critical suppliers beyond tier one (primary suppliers)?
• Which lifeline utilities (power, water, telecommunications) do our operations depend on, and what are their climate adaptation plans?
• How would disruption to transport networks affect our ability to receive inputs and deliver to customers?

Strategic planning

• How are we incorporating climate resilience into our capital planning cycle?
• What climate triggers or thresholds would prompt a material difference and force a reassessment of our strategic plans?
• How are we balancing short-term resilience investments with longer-term transformational adaptation?

Governance and implementation

• Who specifically is accountable for climate resilience within our executive team?
• How frequently do we receive updates on key climate risk indicators?
• What mechanisms ensure climate risk considerations are embedded in day-to-day operational decisions?
   

By rigorously pursuing these questions and leveraging advanced platforms, boards can build genuine organisational resilience that not only protects against risks but unlocks competitive advantage as climate adaptation becomes an increasingly material factor in business performance.