April 18 2005
Financial Times
Sustain Online, Switzerland
Business has often found it expedient to ignore the threat posed by floods, natural disaster and changing weather patterns.
"Companies under pressure from shareholders to deliver annual increases in earnings can find it difficult to justify expensive flood management controls," says Charles Crosthwaite Eyre, head of the climate change practice at Aon, the risk management consultancy.
However, with growing dangers from rising sea levels and changing weather patterns, and legislation compelling business to act, the opportunity for such an approach would appear to be over.
According to Sir David King, the UK government's chief scientific adviser, climate change is "the most severe problem we face today - more serious even that the threat of terrorism".
The facts make stark reading. The 1990s was the warmest decade in the warmest century in the last millennium, a trend expected to continue. The UK Environment Agency predicts temperatures in the UK will rise by between 2C and 3.5C by 2080.
For the UK, changing weather patterns bring the promise of more "monsoon"-style rain, increasing the risk of flash floods, as emphasised by the torrent that engulfed the Cornish village of Boscastle last year. The flood threat is exacerbated by rising sea levels, caused by melting polar ice caps.
The Thames Flood Barrier, which protects London from surges in the river, was raised only three times in the five years after it was opened in 1983. Since 2000, the barrier has been raised 32 times, including three times this year already. If a flood ever did break through the barrier, the damage it would cause has been estimated at Pounds 30bn. More than 5m people in the UK live in areas deemed a flood risk, covering 10 per cent of the country, 2m properties and 185,000 businesses. The government's proposals to alleviate over-crowding in London by building new homes and businesses in the flood-prone Thames gateway will expose hundreds of thousands more to this risk.
Laurence Loughnane, head of underwriting at insurer Norwich Union, points to a several risk management measures companies can take to minimise the impact of floods, and thus limit the cost of insurance.
These include installing physical barriers and flood resistant flooring, keeping computers and other valuable equipment away from the ground floor or basement, and installing one-way valves to drains to prevent them flowing back.
"Companies have to take environmental risk more seriously than they did in the past. The company that takes its flood risk management seriously will undoubtedly benefit from lower insurance premiums," he says.
David Lanfranchi, senior claims consultant at Marsh, the risk management consultant, says: "Insurance companies will charge more if they perceive a greater risk. Companies that can reduce this perception will be seen as better managed and better prepared."
Mr Lanfranchi advises companies to consider how to minimise the equally damaging problem of business interruption in the event of disaster striking. An important part of this, he says, is securing relationships with clean-up specialists.
Aside from flooding, risk managers also advise companies to consider how changes in weather patterns can affect their businesses. The soft drinks industry, for instance, blamed lower sales last year on the fact that the summer was unusually mild. Agriculture, utilities, power and transport companies need also consider the effects of climate change on their operations.
In a rapidly globalising world, companies are also urged to consider the impact away from their own back yards. Larger companies can have important overseas operations and tie-ups, as well as foreign suppliers. Mr Lanfranchi cites the example of the hurricanes that hit the Caribbean last year. While many businesses on the islands secured their premises with roof supports, he says, the same was not true of their workers, many of whom saw their homes destroyed.
Companies, particularly in the financial services sector, are also looking to increasingly "offshore" back-office and customer-facing parts of their operations to the developing world, mainly Asia. As the recent Indian Ocean tsunami demonstrated, the risks of devastating natural disasters in the region are impossible to predict.
Meanwhile, in the face of climate change, governments have been prompted into action, introducing legislation that has serious implications for business. The most obvious is the introduction of the European Union's Greenhouse Gas Emissions Trading Scheme, which aims to help EU states comply with the Kyoto Protocol.
Under the scheme, which came into force in January, 15,000 industrial companies, from oil groups to steelmakers, have had their carbon dioxide emissions capped. Anyone seeking to emit more CO2 must buy credits from companies who emit less than their allocation. Already, a competitive market has been established, with CO2 changing hands for up to Euros 17 a tonne. July's G8 summit in Scotland will place climate change at the top of its agenda. "Legislation being introduced to try to reduce global emissions - accepted as a major contributing cause in the change in the global climate - is increasingly having a much greater and more direct impact on businesses," says Mr Crosthwaite Eyre at Aon. The challenge for business is to understand these new risks and adapt accordingly.
Copyright 2005 The Financial Times Limited
Financial Times (London, England)
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