Assessing Climate Risk for Startups

The climate crisis has forever altered the way we live and work. From startups to Fortune 500 companies across every industry, no organization is immune to the mounting repercussions of climate change. With that being said, how do companies minimize climate risk for startups?

An International Labour Organization report projected that 80 million jobs worldwide would be lost by 2030 due to rising temperatures, with economic losses due to heat stress at work pegged to hit $2,400 billion.

Unfortunately, despite increased climate action, we are currently not on track to meet the Paris Agreement goals, including limiting global warming to 1.5° Celsius (2.7°F). To remain under the 1.5°C target, greenhouse gas emissions (GHG) need to peak before 2025, at the latest, and decrease by 43% by 2030.

Those targets aren’t easy to meet, but they aren’t impossible either. The good news is that the window is still open to meet the goals set out in the Paris Agreement – but it won’t be open for long. A collective and united effort from businesses, governments, and individuals is required to avoid catastrophic and irreversible climate change.

“It’s now or never, if we want to limit global warming to 1.5°C,” said Jim Skea, co-chair of the Intergovernmental Panel on Climate Change Working Group III, in a press release. “Without immediate and deep emissions reductions across all sectors, it will be impossible.”

Responding to the crisis requires being aware of the risks involved to take appropriate action and become part of the solution. For startups, assessing and responding to climate risks may seem daunting, but taking action early on can help position companies for success. After all, climate risk is a business risk. Being aware of climate risks helps prepare future business strategies, and making a difference for the planet is also good for business. In fact, 76% of Americans expect companies to take action against climate change.

Here’s a look at climate risk for startups and the facts they need to know about before responding to risks.

Physical Climate Risk

Physical risks are what most businesses prepare for regarding climate change and involve risks stemming from the physical environment. Hurricanes, flooding, drought, and wildfires are all physical risks resulting from the climate crisis. These extreme weather events have increased in severity and frequency due to climate change, and even the most optimistic climate scenarios don’t forecast that will change. 

Case in point, the top five costliest U.S. weather events all occurred within the last two decades:

1. Hurricane Katrina, August 2005: $125 billion 
2. Hurricane Harvey, August 2017: $125 billion 
3. Hurricane Maria, September 2017: $90 billion
4. Hurricane Sandy, October 2012: $65 billion
5. Hurricane Ida, August 2021: $73.6 billion

These weather events profoundly and inevitably affect all businesses, impacting suppliers, employees, customers, facilities, and other aspects of the supply chain.

Two industries that are particularly vulnerable to the physical risks of climate change are the agricultural and leisure sectors. In agriculture, flooding, drought, and extreme temperatures jeopardize crops and livestock. A recent study found that global farming productivity is 21% lower than it could be without the impacts of climate change. Meanwhile, in the leisure industry, the shrinking snow season has affected operators of snow sports. It’s projected that ski resorts across the U.S. will see winter operating seasons decrease by 50% by 2050 and upwards of 80% by 2090. 

For startups that are unsure about their potential physical climate risks or are interested in future projections, climate modeling tools are available, which use data analytics to assess a business’s exposure to physical climate hazards. 

The traditional view of climate-related physical risks focuses on the direct impacts of weather events, which is understandable given the drastic and immediate effect they can have on a startup business. But many companies are beginning to focus on the indirect considerations of physical climate risk that impact how businesses operate. This includes downstream disruptions that influence markets and consumer behaviors.

Transition Climate Risk

Transition risk has traditionally been the basis for evaluating the financial implications of climate change. As the name suggests, these are the risks associated with transitions, which, in the case of climate change, involve moving towards a low-carbon economy. 

Specifically, these risks involve the costs to startups and other businesses related to changes in policy and regulations (like a carbon tax) that address climate change. Transition changes can also emerge from changes in technology, markets, and consumer trends, which can lead to reputational risks as consumers’ perspectives shift. For example, a PwC survey found that 76% of consumers will end their relationship with a company that treats the environment, their employees, or the community they operate in poorly.

A key consideration of transition climate risk is that as businesses move away from processes that contribute to climate change, they risk ending up with stranded assets – property, infrastructure, or equipment that has seen its value deteriorate due to the green transition.  

While changes associated with shifting to a greener economy bring significant risks, climate transition offers unique opportunities for businesses using new technologies and practices to focus on climate change mitigation. And we can’t overlook the fact that being a sustainability leader has benefits for a business’s reputation.

Liability Climate Risk

The third type of climate risk for startups to be aware of involves liability. While it doesn’t garner the same attention as physical and transition risks, liability climate risk can devastate businesses that don’t take it seriously. 

Liability risk stems from a failure to mitigate, adapt to, or comply with changing expectations regarding climate change. Essentially, the risk involves legal action against a company accused of contributing to the climate crisis.

Just how serious is liability risk? In recent years, there has been a massive surge in climate litigation as a result of advancements in science and changing public sentiment. Worldwide, the number of legal cases related to climate change has more than doubled since 2015. A little more than 800 cases were filed between 1986 and 2014, while the following six-year period saw over 1,000 cases brought forward.

Though climate litigation has mainly been against governments in the past, cases against businesses are on the rise.

Businesses that actively contribute to carbon emissions are at high risk of potential litigation. But it’s not just polluting companies that are at risk. Startups that don’t consider climate change, both now and in the future, are also at risk when developing products and services.

How to Assess and Respond to Climate Risk for Startups?

Climate risk is complex; there’s no doubt about that. As noted in a report by McKinsey:

“For centuries, we have made decisions based on a world of relative climate stability – we are not accustomed to planning for a world with changing climate.”

But that complexity shouldn’t be used as a rationale for not focusing on climate risks. Remember that climate risks are core business risks. That’s why climate risk awareness and mitigation measures need to be at the forefront of decision-making processes and included in any business risk management strategy. Embedding that focus into a business’s plan and culture is fundamental in managing climate risk. 

Part of assessing climate risks means being aware of your startup’s vulnerabilities to climate hazards. Creating a detailed overview of supply chains, infrastructure, and any interdependencies, can help identify those vulnerabilities and provide opportunities for building resiliency.

And since climate change is ever-evolving, addressing climate risks means continually gauging risks and adapting as needed. Above all, responding to climate risks requires a willingness to change. Those efforts will pay off for your startup in the long term.

Keep in mind that potential investors will most likely want to know about your startup’s plans to respond to climate risks to have insight into the resiliency of their investments. Plus, robust climate strategies could attract more interest from investors.

Of course, there are still a lot of unknowns when it comes to assessing climate risk. Having insurance for your business to address potential issues down the road can help alleviate some concerns in the face of climate uncertainty.

Climate change is no longer a distant threat—its devastating impacts are already being felt worldwide. But your startup can be part of the solution by being aware of the risks.