Dare you risk the weather today?

Dare you risk the weather today?
Published: 
May 2012

The weather is wreaking havoc with business as usual. And the scientists say there’s worse to come. Martina Linnenluecke from UQ Business School asks what business can do to be ready and resilient for the next big weather event?

You can’t put a giant umbrella over an open cut mine.

Seven of the top ten most catastrophic financial losses experienced around the world by the insurance industry in 2010 were extreme weather events: tornadoes, severe storms, floods, hail, and so it goes on. Three of those seven occurred in Australia.

This litany of catastrophe has continued throughout 2011 and into 2012 with yet more flooding through Australia, wild storms in America, and drought and famines across East Africa. Martina Linnenluecke sounds a warning: the biggest climate risk facing many businesses is the extreme weather event.

Extreme weather has hit the Sunshine State hard. Mining, agriculture, tourism, retail and construction all suffered during the 2010–2011 wet season – first flooding, followed by the devastation of Cyclone Yasi. The insurance bill for these two events alone is estimated to be $2.4 billion, with an overall loss to production of $9 billion.

The clean up isn’t over. According to Queensland Resource Council’s Chief Executive, Michael Roche: “Several coal mines are carrying a large legacy of water on site, impeding access to the best coal. It will be a multi-year challenge to get back to normal, and cost hundreds of millions of dollars.”

But while climate scientists project more extreme weather events, they cannot tell us where, when or what. Can business build resilience against the unexpected and unknown? After all, as Roche says, “You can’t put a giant umbrella over an open cut mine.”

UQ Business School’s Martina Linnenluecke argues that businesses need to take more account of their natural environment. Learning how to respond to rapid ecological changes, and devising long-term adaptation and resilience strategies are now considered indispensable management practices. Leading the way in this area of risk management, UQ Business School places climate change and scenario-planning firmly on the business curriculum.

SUPPLY CHAIN?

For many companies, when extreme weather hits, it’s the supply chain that suffers. Resilience may be as simple as maintaining suppliers across a range of locations. A catastrophe in one area can be ridden out if your company can turn to suppliers in unaffected regions.

This is the Starbucks Coffee Company model. Coffee thrives in the world’s biodiversity hotspots, rich ecosystems essential to the planet’s environmental health – the very climates prone to extreme weather. Variations in temperatures and rainfall, mudslides and erosion and severe hurricanes have impacted supply. Since 2007 Starbucks have increased their purchase of coffee from the Yunnan province of China 20 fold, a more stable climate region than traditional coffee regions.

LOCATION, LOCATION

The ultimate solution may well be to move to a safer place. The population of New Orleans dropped 30 per cent – by 140,000 people between the 2000 and 2010 census’s covering the time of Hurricane Katrina in August 2005.

Some Far North Queensland banana farmers have made the decision to move away from cyclone prone areas and says, Tully farmer and vice-chair of the Australian Banana Growers Council, Paul Johnston, there’s been a take up of farms in the Atherton Tablelands, Lakeland and Bundaberg since the double whammy of Cyclone Larry in 2006 followed by Yasi in 2011, wiping out 85 per cent of the region’s $400 million industry.
“We thought Larry was as bad as it could get”, he explains. “Then came Yasi. We lost 100 per cent of our banana crop. And 50 per cent of the sugar.” It took Johnston nine months before he had a banana crop to send to market.

“It’s devastating. Letting people go, seeing your crop and everything you’ve invested in it gone.”

DR LINNENLUECKE RECOMMENDS ALL BUSINESSES TAKE STEPS TO BUILD LONG-TERM RESILIENCE

  • Understand where you do business: are you, your suppliers or your customers in a climate hotspot?
  • Diversify: what you do, who supplies you and where you’re based. One extreme event needn’t wipe out all your operations.
  • If you can, move to a safer spot for your business.
  • Build partnerships to share knowledge and risk with other organisations.
  • Understand government and institutional support and resources.
  • Understand your ‘slack resources’ – off-site back-up facilities or financial reserves which you can call on in response to extreme events.
  • Audit your insurance cover: don’t leave any nasty surprises in shortfall until it is too late.

DIVERSIFY AND SPREAD YOUR RISK

Small businesses often lack the capacity to diversify activities. But there is more that they can do than just check their insurance is paid up and cross their fingers. Business groups are working together to increase knowledge and spread risks, and to lobby governments to protect their interests.

Small businesses need to know how to access government support in the event of a business interruption. The Victorian and Federal Government provided a series of grants and loans, and a professional business advice and counseling service in the wake of the 2009 bushfires and 2010 floods.

Large corporations can also play an important role in helping small producers. Starbucks sources the majority of its coffee from tens of thousands of small coffee growers, typically with land-holdings of less than 30 acres. Through its Small Farmers Sustainability Initiative, Starbucks has reached over 56,000 small-scale farmers, providing loans and assistance to cooperatives, helping them build resilience through managing risk, sharing knowledge and improving environmental stewardship.

INSURE

The insurance – and reinsurance – industry sits on the front-line of the climate–business battle. After all, they foot the bill when their customers suffer losses.

Insurance has been the way that most businesses – particularly those with long-lived and exposed infrastructure and fixed geographic locations (for example, energy, agriculture and tourism) – have typically mitigated their financial exposure to extreme weather events.

The sector is moving to influence businesses to introduce climate friendly activities, the plan being to reduce the extent of potential climate change. Insurance companies also lower their own exposure if they can encourage businesses to develop long-term resilience. Mark Way, Senior Vice President, Head Sustainability Americas, at global reinsurer Swiss Re believes “It is essential for society to reduce greenhouse gas emissions and adapt to the impacts of climate change by building climate risk considerations into the decision making process.”

Dr Linnenluecke argues that, while they have put considerable resources into investigating climate impacts, there is still an opportunity for insurance companies to help their clients be better prepared to cope with damage and loss of business in the wake of extreme weather damage.