Climate risk management: How to prepare your business for fires, floods and heatwaves 

A recent BDC study shows that about one-third of Canadian small and medium businesses have already been impacted by climate disasters. This figure is expected to rise as Canada warms twice as fast as the global average.

Now is the time to manage climate risks, which—in addition to threats to health and safety and property damage—may include supply chain disruptions, legal and regulatory changes, and heightened accountability for company actions.

“There’s no question businesses face growing climate risks,” says Matthew Baer, Chief Audit Executive at BDC. “The environment is changing. In order to address the risks, businesses need to change too. Failure to prepare effectively is likely to have operational, financial and reputational impacts. With effective risk management and planning for the future, companies may identify opportunities and advantage through proactive readiness”

He advises businesses to start including climate risks and mitigation in their strategic planning. “It’s important to recognize the new operational and strategic reality and start planning early,” Baer says. “There is a tremendous opportunity in making changes. If your business acts sustainably, it will give you an advantage.”

What climate risks do Canadian businesses face?

Baer lists nine key climate risks that Canadian businesses should prepare for.

1. Changes in laws and regulations

All levels of government—from the federal government to municipalities—are likely to enact new laws and regulations to address climate change. These could include :

• new reporting and disclosure requirements
• carbon pricing
• energy conservation subsidies and tax incentives
• tighter rules on pollution and harmful chemicals
• emissions reduction requirements
• sustainability requirements in government contracts

Governments are also likely to increase investment, grants and other support for projects that support a green transition. “It’s difficult to anticipate how and when rules will change, but it’s important for businesses to start considering this in their planning,” Baer says.

2. Changing customer and employee habits

Clients and employees are becoming more discerning. Customers are willing to pay more for sustainable products and increasingly want to do business with green-friendly companies.

“There is a tremendous opportunity in these changes,” Baer says. “If your business acts sustainably, it will give you an advantage with customers. If you’re not addressing this, you’ll be a few steps behind. Think about the image your organization is portraying and the environmental positioning you’d like associated with you.”

Employees feel the same way as customers. Being greener is likely to help with hiring and retention. You can offer initiatives such as:

• electric car charging ports
• public transport subsidies
• improved indoor air quality
• energy conservation

“Ask yourself what new and innovative offers can be made to your employees to support their and your climate ambitions,” Baer says.

3. Carbon reduction expectations

Canada has pledged to reduce greenhouse gas emissions by 40 to 45% of 2005 levels by 2030 and to achieve carbon neutrality (net zero emissions) by 2050. Attaining these goals will require contributions from all sectors of the economy, including small and medium-sized businesses.

“If companies don’t participate, it won’t be possible to achieve the Canadian goals,” Baer says.

Expect to see government measures aimed at reducing emissions. These could include subsidies and tax incentives for greener equipment, emissions caps, carbon pricing and a greening of infrastructure projects and electrical grids.

“Businesses need to pay close attention to coming carbon reduction initiatives,” Baer says. “Some could be disruptive, while others could present significant opportunities.”

4. Transition expenses

Transitioning to a greener economy will cost money. Businesses need to anticipate those costs in their planning. Some sustainability projects can can eventually pay for themselves, but they often require initial spending that involves cash flow forecasting and financing.

5. Accountability to lessen carbon footprint

Customers, employees, partners and others will increasingly scrutinize your company’s sustainability performance.

“If you’re the only one not taking action, you will be deemed accountable,” Baer says. “People will be watching and judging.”

6. New insurance requirements and costs

Insurance premiums are already rising for some businesses due to growing climate risks. Those risks and the associated premiums will only increase. Understand any risks unique to your business, and consider how those may affect your insurance. You may need to change your coverage to protect your business locations, assets and routes.

7. Geographic risk

Your company’s location determines its exposure to climate risks. Be sure to consider physical risks at all of your locations, including:

• facilities and other assets
• operations
• where employees and customers live
• supply chain
• distribution network

8. Supply chain risks

Climate change will cause increased disruption to supply chains. That will lead to price increases and fulfillment issues, such as delivery delays.

“We already saw what can happen to supply chains because of the pandemic and labour shortages,” Baer says.

Look at ways to diversify your supply chain, including exploring local alternatives and geographic diversity.

9. Reputational risks

Reputational risks related to sustainability performance will increase for businesses. “Companies that act early and make tangible efforts will benefit reputationally,” Baer says.

How to mitigate climate risks

Once the major climate risks you face have been identified, Baer recommends these steps to mitigate them. You can also download BDC’s free checklist to prepare for climate emergencies.

1. Set realistic climate-related targets

Be realistic about your climate goals. Many businesses overpromise, fail to achieve their targets and risk reputational harm and organizational discouragement. Be incremental about changes and carefully consider how they will impact your organization.

2. Join industry groups

Joining industry groups is an excellent way to learn about climate best practices, get peer advice and find expertise to help you achieve sustainability goals.

3. Consider energy conservation, renewable energy and carbon offsets

Greening your energy use can require an upfront investment, but it usually pays off with reduced costs and other benefits. Start by measuring your carbon footprint and use it to develop an emissions reduction strategy.

4. Design products and services with sustainability in mind

Greener products and services offer your business reputational benefits, help you achieve sustainability targets and can boost employee engagement.

5. Build resiliency in your operations

Look at your assets’ locations and the types of climate risks they face. Then, prepare contingency plans for extreme weather events or other disruptions to your business.

Also, consider your inventory strategy. If your suppliers are far away or in risk-prone areas, you may want to consider stocking more goods to protect against interruptions. You’ll also want to identify alternative suppliers and contact them to determine whether they could help in a crisis.

Frequent climate risk mistakes

Many businesses fail to understand their climate risks and do not take appropriate action. Here are some mistakes to avoid.

1. Not acting

Many companies haven’t thought realistically about their climate risks and haven’t taken any action to prepare. “Leaders must be proactive in defining their company’s path in light of climate changes,” Baer says. “Costs are going up, public opinion is shifting, new technologies are available, physical exposure in some areas is growing.

“The consequence of underestimating risks and taking a reactive approach is that some businesses will be left behind and may find it impossible to catch up. It is essential that companies identify the most relevant risks to their business, assess their potential short- and long-term impact and establish mitigation strategies that best support the achievement of their targets.”

2. Taking only symbolic steps

Many companies only take symbolic steps. “Just changing a label or adding a green section on a website or recycling in the office is no longer sufficient to address climate change,” Baer says. “Real change is necessary.”

3. Not being pragmatic

Some businesses invest heavily in new technologies or equipment without adequate research or understanding of the investment. This can result in extended payback periods or a loss on the investment.

Some businesses also consider excessive insurance to protect against climate risks. “It is critical to speak with your broker or insurance company to right-size your insurance considering your risks,” Baer says.

4. Not being transparent

There’s no benefit in concealing what needs to be done to support your climate ambitions. “By openly exploring options, you have the opportunity to engage your employees, customers and even competitors in the right dialogue to support your business and community,” Baer says.

Next step

Is your business looking to integrate sustainable practices? Discover even more resources to support your efforts.