Financial Risks of Climate Change: CFO's Should Pay Attention

National Hurricane Center, NOAA

At the Wall Street Journal’s CFO Network Annual Meeting, held on June 11, 2019, Zurich Insurance Group chief risk officer Alison Martin explained that CFO’s should take a leading role in analyzing their companies’ exposures to weather related risks.  According to a report published by CDP Worldwide, a U.K. environmental nonprofit, the world’s 500 largest companies face $1 trillion in potential financial risk from climate change.

CFO’s need to make climate risk assessments a bigger priority, and actively assess how environmental issues could affect their companies’ bottom line.  For more information, click here to read the Wall Street Journal article.

Additionally, climate change and its potential ramifications are now on the radar screen of financial institutions.  Although not a yet standard industry practice at this time, as of this publishing of this article, 26% of banks and financial firms say they have established dedicated teams for evaluating climate-related risks, and how these may affect their bottom-line. Financial institutions find they are under increased scrutiny from investors and regulators.   Click here to read the entire Wall Street Journal article.

Based on these articles, published within days of each other in the Wall Street Journal, it is evident that climate change as it relates to the financial health of an organization is becoming a hot-button issue.  More scrutiny as to the potential fall-out from these risks is sure to arise in the coming years – affecting organizational risk management, the financial bottom-line, how to evaluate these risks, and ultimately who in an organization will be tasked with the responsibility of where the buck stops.

NFPA 1600 2019 Edition: A Resource for Every Practitioner and Auditor

                                                         Risk and Resilience Hub

Don Schmidt, Preparedness, LLC CEO was recently published in Risk and Resilience Hub. In this article, Don explains how NFPA 1600, 2019 Edition, the most mature standard of its kind, defines the inter-connected elements of a preparedness program including program management, risk assessment, business impact analysis, loss prevention/hazard mitigation, emergency management, business continuity, crisis management, and crisis communications.  Read Article

Hurricane Preparedness

As the 2019 Hurricane Season is upon us, officially beginning on June 1^st, we have already had one named storm.  Storms do not check the calendar, and the “season” is an estimate of when these storms can occur.

The 2019 season is predicted to be a “near normal” season, with about 9 to 15 named storms, with 4 to 8 of these becoming hurricanes.  

However, no matter how many storms are predicted, it is important to remember that it only takes one powerful storm to hit where you or your organization are to cause catastrophic destruction and death.  So planning and preparing for hurricane season should be the same, whether it is forecasted to be a moderate or heavy season.

When we think of hurricanes, one usually thinks of winds – how strong the winds are determine if the hurricane is a category 1, 2, 3, 4 or 5.  However, according to Ken Graham, National Hurricane Center Director, history has shown that 90% of fatalities in hurricanes are in fact due to water.  In the last 3 years alone, 83% of deaths during hurricanes have been due to water.  While we think of winds, we really must focus on flooding, and how to protect property and life from the effects of flooding.  

Flooding caused by stalled storms that dump a tremendous amount of water on already soaked land can happen well inland.  Storm surge is a coastal concern of water pushed onto the land by the force of the storm.  With more people living on the coast than ever before, there are more lives vulnerable to the dangers of storm surge.

Hurricane planning includes multiple phases:

• Before Hurricane Season
• Tropical Storm or Hurricane Watch
• Tropical Storm or Hurricane Warning
• During the Storm
• After the Storm

For information on Hurricane Preparedness, take a look at the Preparedness Bulletin for detailed information on how to prepare.

Analyzing flood exposure is an important part of preparing for storm season.  Our Preparedness Bulletin, Flood Preparedness is instructive, and provides resources on where to find information specific to your region. 

A plan that accurately identifies the resources and time needed to prepare has the greatest chance for success.

Severe Weather Preparedness

Springtime brings a welcome change in seasons.  Along with blooming flowers and trees and warmer temperatures, it also marks the start of Severe Weather season. The first week in May is Severe Weather Preparedness Week.  Severe weather in warm weather months include thunderstorms and the devastation that may come from them: the potential for flooding, high winds and tornadoes.

A thunderstorm is a rain shower with thunder.  Since thunder comes from lightning, all thunderstorms have lightning.  A thunderstorm is classified as “severe” when it contains one or more of the following:  Hail (3/4 inch or greater, winds gusting in excess of 50 knots (57.5 mph) or a tornado.  On average, about 10% of thunderstorms are classified as severe.

Lightning strikes the U.S. about 25 million times each year, kills an average of 47 people annually, and injures hundreds more.^[1]  When lightning is detected, it is important to take shelter as there is no safe place outdoors when thunderstorms are in the area. “When Thunder Roars, Go Indoors”^[2]  Once the storm has passed, wait at least 30 minutes after the last thunder is heard before resuming outdoor activities.  Once the storm has passed, assess any damage to your property.  Contact local authorities if there are power lines down.

High winds can occur during a severe thunderstorm.  Winds speeds of 40 to 50 mph can produce localized damage.  “Straight-line” winds, which are not associated with any rotation, can exceed 100 mph and can cause widespread damage, and blow objects making them airborne, posing a significant threat to personal safety.  If you are outdoors, take shelter in a sturdy building.  If not near a building, take shelter in your car.  If no shelter is available, stay away from trees and power lines.

A tornado, which is spawned from a severe thunderstorm, is a violently rotating column of air extending from the base of a thunderstorm down to the ground. Tornadoes are capable of completely destroying well-made structures, uprooting trees, and hurling objects through the air like deadly missiles. Tornadoes can occur at any time of day or night and at any time of the year. Although tornadoes are most common in the Central Plains and the southeastern U.S., they have been reported in all 50 states.^[3]

If a tornado warning is issued, go to the basement or an interior room in your home/school/business, away from any windows. If you are outside, it is imperative to seek shelter in a sturdy building immediately. Once the authorities have deemed it safe and the tornado(s) has passed, carefully assess your property for damage.  Stay out of damaged buildings and contact local authorities if you see power lines down.

Flooding is caused when bodies of water (e.g. rivers, streams, lakes, oceans, etc.) overflow their normal boundaries.  Flooding can also occur as storm water runoff accumulates in normally dry areas. Read the Preparedness Bulletin on Flood Preparedness to learn more about how your organization can create an emergency plan to deal with floods, as well as how to mitigate the risk as well as recover from an unexpected flooding event. 

For more information about severe weather threats, including mitigation strategies for your organization, read Preparedness Bulletin: Thunderstorms, Lightning & Tornadoes. 

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[1] Weather.gov; https://www.weather.gov/safety/lightning ; access date 5-8-2019

[2] Ibid

[3] National Weather Service; https://www.weather.gov/safety/tornado; access date 5-8-2019

Business Impact Analysis: Vulnerabilities, Loss Potential and Mitigation

Donald L. Schmidt spoke at RIMS2019, the Risk & Insurance Management Society's annual conference, on the value of the business impact analysis (BIA) to risk management. He explained how the BIA identifies vulnerabilities and opportunities for risk mitigation. He also addressed how the BIA provides a methodology for quantifying business interruption and prioritizing the recovery of business operations.  View the presentation.

Read Preparedness, LLC's bulletin on Business Impact Analysis for an in-depth look at this important process and how it can prepare your organization.   

NFPA 1600 2019 Edition Webinar

NFPA has published the 2019 edition of NFPA 1600, “Standard on Continuity, Emergency, and Crisis Management.” In this webinar Don Schmidt, past chair of the committee, reviewed the new and revised content in the 8th edition of this important international standard. Access this webinar to learn how you can use this tool to improve your organization’s resilience. http://bit.ly/2Xenljr

Download Preparedness, LLC’s Self-Assessment Checklist (insert picture) based on NFPA 1600 “Standard on Continuity, Emergency, and Crisis Management” 2019 Edition.  Containing over 200 questions, this is an important tool to help your organization evaluate its preparedness program.  http://bit.ly/2ufM3B4

CFOs May Be Held Accountable for Climate Change Catastrophes that Affect a Company's Bottom Line

FM Global’s, Report Master the Disaster Report: Why CFOs Must Initiate Natural Catastrophe Preparedness in 2019 and Beyond^[1] makes the compelling case for CFOs to explore the broader financial consequences of natural disasters, and to allocate capital towards loss prevention and business interruption.

Insurance policies are implemented as they are thought to absorb most property damage and business disruption losses, however, they do not cover all economic risk.  Market share, reputation, cash-flow and even potential growth opportunities may be adversely affected by a prolonged disruption, resulting in economic hardship for an organization. 

While companies may take the gamble that unpredictable events are not likely to occur in this earning year, this is taking short-term view of profits over long-term viability.  Devastating results can be the consequence, even with a moderate natural disaster.  FM Global’s CFO Kevin Ingram says that “The buck stops with the CFO.”  If a company is unprepared for a natural disaster, wide-ranging stakeholders including institutional investors, shareholders, Wall Street analysts, consumers and regulatory agencies will be privy to this information.

FM Global reviewed 10-K filings of nearly 100 public companies that experienced damage and disruption in 2017 from Hurricanes Harvey, Irma or Maria.  Findings saw losses ranging from a few million to hundreds of millions of dollars.^[2]  The U.S. Securities and Exchange Commission has clarified their position on climate change risks, instructing companies to treat these material risks from climate change like any other business risk.  This position will likely place CFOs facing hard questions if losses are incurred and no plans have been put in place to deal with these natural disasters.

Risk managers, who typically have an inward-looking role in their organizations, are charged with planning for risks that already exist.  While this can improve vulnerability for a company, a more global view is typically needed.  The CFO, with their C-Suite vantage point and outward-looking focus, has the ability to completely eliminate some of these risks.  For example, the risk manager may allocate money to fortify a critical plant against flood exposure, whereas the CFO has the influence to change the landscape entirely by moving the plant from a flood plain to higher ground, eliminating the flooding risk completely.

The bottom line is CFO’s will be on the hot-seat if a natural disaster has negative impacts on the company’s profitability and survivability.  Natural disasters have the potential to impact global supply chain, impact cash flow, and severely impact customer relationships.

For the complete picture, read FM Global’s Master the Disaster:  Why CFOs must initiate natural catastrophe preparedness in 2019 and beyond.  Click Here

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[1] FM Global. Master the Disaster: Why CFOs must initiate natural catastrophe preparedness in 2019 and beyond.  W00644_18 © 2019 FM Global (01/2019)

[2] Ibid