Climate risk is a vexing risk management challenge for societal decision-makers and for many business decision-makers. It can seem like just one more problem to add to an already over-loaded “risk list” or Enterprise Risk Management (ERM) system, and a problem that may seem hard to prioritize in the face of more seemingly immediate problems. The seemingly infinite amount of potentially relevant information doesn’t help, although knowledge management tools such as the Climatographers’ Climate Web™ can help.
It is therefore not surprising that business decision-makers often conclude that they (and their organizations) just don’t have the bandwidth to tackle climate risk in the comprehensive way that increasing numbers of stakeholders are demanding. The danger for these decision-makers is that the short-cuts they might implement under the auspices of corporate social responsibility, for example, can backfire if they are dismissed as intentional or unintentional “greenwashing.” Worse yet, climate risks may sneak up on them, manifesting in business-material ways sooner than they ever expected.
A key question for business executives and risk managers is whether they want to take the risk of having to characterize future climate risk outcomes as “black swans” they could not have anticipated, while regulators and other stakeholders argue that if they had been paying attention they could have been better prepared. The answer could have widespread brand risk, liability risk, regulated return, and ultimately financial risk ramifications. These ramifications should be balanced against the opportunities business decision-makers do have to assess and manage those risks.
Another benefit of improved risk assessment and risk management processes are the opportunities that companies may identify. During the recent financial and mortgage crises, fortunes were made by participants who did not wait to be surprised by “black swans,” and who positioned themselves to win when risks caught up with the rest of the market. There is no doubt that climate change will offer many similar possibilities for forward-looking market participants.