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Extreme Weather Is the New Reality

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There's been a nasty change in the weather of late, and for businesses the forecast is simple: be prepared.

In 2011, extreme weather caused more than $148 billion in economic losses, and $55 billion in insured losses globally. A major chunk of those insured losses -- more than $30 billion -- were in the U.S. where 14 severe weather events caused losses of more than $1 billion each, far more than in any previous year. We've just lived through the warmest decade on record, seen unprecedented flash storms and flooding and watched as Texas suffered through the worst drought in its history.

Just a normal variation in the weather? "No," is the overwhelming scientific consensus. Human activity is changing the climate, and the climate is changing the weather. Buckle up. It's going to be a wild ride. And virtually every business in every sector of the economy is vulnerable.

That's why Ceres, Oxfam America and Calvert Investments released a new guide last week, "Physical Risks from Climate Change,"designed to prepare businesses and investors for facing and disclosing climate-related risks.

What are they up against? For the agriculture and food and beverage sectors it means crop failures, loss of productive land and commodity price volatility. Drought will increase in some areas and severe flooding will rise in other places, while changing growing seasons and unpredictable pest and disease distribution will pose additional challenges.

For the insurance industry it means massive exposure to property damage and business losses from storms, wildfires, floods and droughts. For the electric power and oil and gas sectors it means supply disruptions and disabled infrastructure. The new report also details comparable risks in the apparel, mining and tourism sectors. In short, climate change is bringing with it a whole new world of risk for businesses, investors and the economy -- risks that many companies are under obligation to disclose.

In both the U.S. and Canada, public companies have a legal obligation to disclose to investors any information a "reasonable investor" would find material. In 2010, after being petitioned by investors led by Ceres, which directs the 100-member Investor Network on Climate Risk (INCR), the U.S. Securities and Exchange Commission issued guidance to companies stating that climate-related risks meet this test. (INCR members manage about $10 trillion in assets.) Canadian securities regulators followed suit.

Beyond these general disclosure requirements, the report includes a series of sector-specific questions companies should be answering.

While the physical risks from climate change vary from sector to sector, as will the adaptation and risk management strategies, the report emphasizes that regardless of sector some general principles apply.

First, physical climate risks are business risks and should be managed as such. Second, because physical climate risks exist throughout supply chains and can have broad impacts beyond a company's physical boundaries, effective management of climate risks requires robust stakeholder and community engagement. Third, managing climate risk must be a high-level board and executive commitment, and may require bringing in new expertise. And fourth, the inevitable uncertainty in predicting exact climate impacts is not an excuse for inaction. Climate change is not a distant theoretical concern, but a clear, present and immediate risk that companies need to address now.

Hope for the best; prepare for the worst. For businesses facing a changing climate, preparing for the worst means managing climate-related physical risks.