TAKING ACTION ON CLIMATE CHANGE: With the likelihood and potential impact of climate change-related risk only becoming more pressing, what can risk managers do to help their companies assess their exposure and determine how to respond?

• Author: Hodge, Neil
• Position: COVER FEATURE - Cover story

Last October, the United Nations' Intergovernmental Panel on Climate Change (IPCC) reported in its Summary for Policymakers that the world is failing to keep the global temperature increase below the recommended 1.5[degrees]C from pre-industrial levels, and temperatures are instead climbing toward a 3[degrees]C rise.

Even reaching 2[degrees]C above pre-industrial levels will mean a likelihood of more frequent extreme weather events, resulting in significant economic shocks and major business interruption losses. A 3[degrees]C temperature rise will likely be catastrophic. The IPCC said that limiting the increase to 1.5[degrees]C will require "rapid, far-reaching and unprecedented changes in all aspects of society." For example, the transition to a cleaner energy system alone will require an investment of around 2.5% of global GDP--equivalent to the value of all goods and services produced worldwide--every year for the next two decades.

On Nov. 22, the U.N. released its Emissions Gap Report, which said levels of heat-trapping greenhouse gases in the atmosphere--responsible for climate change, sea level rise, ocean acidification and extreme weather--have reached another new record high and that there is no sign that this trend is reversing. After recording the first rise in carbon dioxide emissions in four years, the report said that global efforts to tackle climate change are way off track.

The following day, 13 U.S. federal agencies issued the Fourth National Climate Assessment, which offered the starkest warnings to date of the consequences of climate change for the United States. If significant steps are not taken to rein in global warming, by the end of the century, it predicted the damage will knock as much as 10% off the size of the U.S. economy and result in specific costs of $141 billion from heat-related deaths, $118 billion from sea-level rise, and $32 billion from infrastructure damage.

The report warned that trade and agriculture will be among the hardest hit, as extreme weather events driven by global warming are "virtually certain to increasingly affect U.S. trade and economy, including import and export prices and businesses with overseas operations and supply chains." Disasters like droughts and wildfires will temporarily shutter factories both in the United States and abroad, causing price spikes for products ranging from apples to automotive parts. And because American companies rely so heavily on international supply chains, almost no industry will be immune to the effects of climate change at home or abroad.

The report cites as an example the extreme flooding in Thailand in 2011. Western Digital, an American company that produces 60% of its hard drives there, sustained $199 million in losses and halved its hard drive shipments in the last quarter of 2011. The shortages temporarily doubled hard drive prices, affecting other U.S. companies like Apple, HP and Dell.

The 1,656-page climate assessment goes so far as to say that climate change is taking the United States into uncharted territory. "The assumption that current and future climate conditions will resemble the recent past is no longer valid," it said.

DISCLOSING CLIMATE RISKS

Climate risk could have a serious...