How is climate change going to affect my assets?

June 6, 2019

How is climate change going to affect my assets?

A question we often hear is: "How is climate change going to affect my assets?" When we investigate the impacts from climate change hazards (e.g.more extreme rain events and increased water stress) we look into a myriad of damages that can be described by the following terms:

  • Direct loss - due to direct contact with a hazard
  • Indirect loss - not a direct result of a hazard, but a consequence of a hazard
  • Quantifiable loss - can be objectively quantified
  • Non-quantifiable loss - not readily quantifiable due to ethical or more sentimental reasons

These make four categories of loss which can affect your business and its assets! To understand a bit more about each of those categories, let's go through them.

Direct, quantifiable loss

This category includes material losses caused by direct contact with a hazard. Some examples of these damages are structural losses, inventory loss, reduced crop yield, loss of productive land and loss of infrastructure. Damages in this category are often insured, so it is the best understood category and the one for which we have most documentation. There are, however, still many uncertainties as insurance companies rarely share their processes or documentation. However, possible damages can be underestimated as not all assets are insured.

Indirect, quantifiable loss

This category includes measurable losses that occur as a consequence of a hazard. These include business and production interruptions, delays in infrastructure,temporary rehousing, and income loss. In order to assess these losses some case studies have applied a percentage of direct damages as representative of the indirect damages. However, this assumes that there is a correlation between direct and indirect losses, which is not always the case. In other studies a sector specific loss unit is applied. For instance the gross margin per day multiplied by the duration of the interruption can quantify the loss due to business interruption. The disruption to people may include their average wages and duration of disruption.

Non-quantifiable loss

Direct and indirect, non-quantifiable losses cover often irreversible losses, such as loss of life, loss of memorabilia, damaged cultural heritage and undermined trust in authorities. These losses are often most significant in developing countries where emergency response and warning systems are limited. Non-quantifiable losses are often excluded in damages cost assessments due to their nature of being extremely hard to monetize. They have sometimes been included in a more qualitative manner by applying a multi-criteria risk assessment, where some assets are weighted higher by specific vulnerabilities.

So what does that mean to me and my company?

While some companies are aware of their potential direct losses, they may not consider indirect or non-quantifiable losses. Others have not looked into potential losses from climate change at all! HazAtlas can help you broaden your awareness of your companies potential impacts.

In order to assess how climate change is going to affect a company's assets and supply chain it is necessary to categorize the types of loss a company may experience. When potential losses have been identified, research can go into estimating unit costs or applying existing studies. There is still much research to be done (and it is being done!) for all categories. Another thing to keep in mind is that as some losses cannot be monetized, underestimation of losses is very likely.