Using Scenario Testing to Assess Climate Risk.

ONE OF THE WAYS RISK MANAGERS can determine which areas of the business might be most adversely affected by climate change is through scenario testing and modeling. Some organizations such as the International Energy Agency (IEA) already provide lists of questions and possible outcomes that risk managers can use to guide the process.

In addition to looking at issues such as rising energy prices and identifying what legislation and regulation may be enacted to force or encourage companies to become more environmentally friendly, the lEA's scenarios also look at what the possible impacts could be on companies if certain markets mandated stricter measures on carbon pricing and waste management.

According to Don Reed, executive director at sustainability consultancy Anthesis Group, risk managers can use these scenarios to work out the cost implications of either complying with these new rules or moving operations to a country with less onerous regulations, how much downtime such a change may result in for the business, and what the initial and long-term financial cost could be as a result of the disruption. They can also examine their competitors to see how exposed they may be to the same risks. Further, they can show the board what preparations these companies might have in place to mitigate such problems and even give an estimate of the associated costs.

Conducting such scenario testing to examine the potential weaknesses in an organization's extended supply chain can be a very rewarding exercise. "Companies can have thousands of...