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Extreme weather events were seen as the most prominent risk in the World Economic Forum’s 2018 Global Risks Report. Whether it’s the threat of a flood, storm, earthquake, pandemic or man-made hazard, building the resilience of your business to disasters is becoming just as important as managing your reputation or testing your products before launching them.
There are strong economic, financial, legal, reputational and regulatory reasons for doing so.
Here are 10 good reasons why businesses need to take reducing their exposure to disaster seriously:
1. Disasters directly affect business performance and undermine longer-term competitiveness and sustainability – but many small and medium-sized enterprises do not have business continuity plans in place. A survey of 208 New Orleans-based small and mid-sized enterprises, the majority located below sea-level, found that fewer than half of respondents had an emergency plan in place 11 years after Hurricane Katrina.
2. Moody’s Investor Services now incorporates climate change into its credit ratings and lists six indicators “to assess the exposure and overall susceptibility of US states to the physical effects of climate change”. The 2011 floods in Thailand destroyed multiple manufacturing sites and resulted in a downgrade in credit rating for some affected companies.
3. The protection gap is growing. This means that economic losses overall are increasing at a faster rate than insured losses. In 2017, total economic losses were $337 billion, but total insured losses were only $144 billion. Overall, economic losses may be under-reported by as much as 60%. Avoiding exposure entirely is not always possible, but if you want to qualify for insurance, you should be able to demonstrate that you are risk-aware and actively managing those risks – e.g. with a flood emergency response plan.
4. Private investment largely determines disaster risk. In most economies, 70% to 85% of overall investment is made by the private sector, including institutional investments worth more than $80 trillion annually. FM Global has found that every dollar spent on hurricane protection can prevent $105 in business property loss.
5. Big data is an important part of doing business. Data sets on disaster losses are an area of growing interest to risk-aware investors. Private sector inputs are important in building national disaster loss databases for risk profiling. Currently about 100 countries are doing so with the support of the UN.
6. Maritime transport handles over 80% of the volume of global trade. Some of the most densely populated cities in the world are port cities, which have a high volume of economic assets exposed to sea-level rise and are increasingly vulnerable to floods and storms. The top 10 cities in terms of exposed populations are estimated to be Mumbai, Guangzhou, Shanghai, Miami, Ho Chi Minh City, Kolkata, Greater New York, Osaka-Kobe, Alexandria and New Orleans.
7. Investments that increase disaster risk may directly increase the cost of disasters to affected communities and leave the business concerned facing a consumer backlash and litigation. In an ongoing case, 21 people were charged with homicide in 2016 following the deaths of 19 people in the collapse of the Fundão tailings dam, Brazil’s worst environmental disaster.
8. It is in the interest of businesses, particularly those with large fixed assets, to work closely with local government to manage disaster risks and safeguard critical infrastructure. Business continuity can be severely impacted by power outages, communications failures and the collapse of transport systems, with consequences for customers and employees alike.
9. Envisaging the worst-case scenario is important when it comes to managing disaster risk. Global supply chains can be thrown into disarray when disaster strikes. According to a survey in 2017, the majority of companies surveyed do not have full visibility on their supply chains. In the three months following the 2011 Tōhoku earthquake and tsunami in east Japan, automobile production declined as follows: Japan, 48%; Thailand, 20%; Philippines, 18%; and Malaysia, 8%.
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10. Both regulators and investors are increasingly demanding that businesses disclose their hidden risks, including disaster risks, and price them accurately on balance sheets. Factoring risk into investment decisions does not always mean avoiding disaster-prone locations, but should come with a good understanding both of the national and local strategies for disaster risk reduction that are in place and of recovery capacity.
