As climate threats escalate, ESG needs an ‘R’ for resilience

From governments to investors, a consensus is emerging that our risk exposure to climate change-driven disasters could grow exponentially. Worldwide, natural catastrophes accounted for $190 billion in U.S. dollars in 2020, up 50 percent from 2019. Part of this rise is attributable to an uptick in hurricanes which, like wildfires and other natural disasters, are expected to happen with increased frequency due to climate change. Insurer Swiss Re estimates that climate change could be a $23 trillion blow to the global economy by 2050. Moreover, as the world continues to barrel toward greater global emissions, the risks tied to businesses will increase, despite a short-term corporate focus on the issue.

While we may think of the climate crisis as something governed primarily by state actors, major companies account for considerable emissions and have an outsized impact on policy, from voluntary disclosures to Environmental, Social and Governance (ESG) related pledges. 

It is becoming increasingly standard for companies to make zero-carbon pledges and publicly state emissions targets as part of their climate commitments. But this is simply not enough. We’re past the point where zero-carbon pledges on their own can reverse or even stall the impacts of climate change. As a result, investors and regulators are increasingly asking whether businesses can weather future climate crises.

They’re right to be concerned. When I served as President Obama’s FEMA administrator, we repeatedly saw record-breaking disasters that caught institutions off guard. 

Addressing climate hazards means businesses must add another letter to ESG — that’s R for resilience. At the institutional level, resilience means understanding and mitigating climate threats and their ripple effects to businesses and communities. Whether it’s safeguarding electric power and water sources or understanding how a disaster might affect the flow of vehicle traffic or supply chains, organizations are responsible for identifying the previously “unknown unknown” variables of a disaster event. Resilience is more than a business continuity plan or an insurance policy, and it must be founded on a data-tested understanding of current and future climate threats. Resilience also means disclosing to partners and stakeholders the hazards at play and working collectively to address a world of worsening weather events.

Achieving this future will require increased private-public sector collaboration, greater access to data, better probabilistic modeling to understand climate threat scenarios and transparent and accurate risk disclosures. One can imagine natural hazards today as similar to cyber risk in the early days of the internet, in that organizations simply are not equipped to understand or take action to safeguard against their vulnerabilities. 

Our climate approach can’t solely rely on polluting less or implementing green solutions. We must know our blind spots, now. We must accurately account for our climate risk exposure, from quantifying carbon emissions to quantifying their ultimate impacts.

A world where disclosures of climate-related risks become common will require tighter accounting and clearer measurements around resiliency. In April, U.S. Treasury Secretary Janet Yellen, while making a case for standardized systems of measuring green investments, called for increased considerations around “resilience and life-cycle cost” to meet environmental goals. Right now, the rules for companies aren’t clear enough and there aren’t adequate carrot or stick incentives for businesses to enact meaningful practices. Changing this fact will bring more key players to the table.

This isn’t simply a matter of accountability. Both individual companies and their investors have a clear interest in better understanding climate-based risks to the infrastructure on which they depend. Encouraging concrete, measurable disclosures about the physical risks from extreme weather will shine a light on the financial risk climate change is posing, creating accountability for publicly held companies.

If climate change were an abstract future concern, inaction might be more understandable. But the present climate crisis is already causing lasting, even irreparable damage to the planet, our societies and our collective livelihoods.

The U.S. has an opportunity to lead in climate resilience, which aligns with both our long-term strategic and economic priorities. The past few decades have seen a much-needed uptick in individual and corporate interest in addressing the climate crisis. But doing so effectively will require businesses to go beyond platitudes and traditional methods of affecting change to address the more fundamental problems. 

Disclosing climate-related vulnerabilities will help incentivize companies to act in not only their best interests but the interest of society. If we get this right, we can lessen the impacts of natural catastrophes and lead the way for global communities and institutions to follow suit, with the hopes that in the future, our changing climate might not be as disastrous.

Craig Fugate is a former FEMA administrator during the Obama administration and is currently the chief resilience officer at resilience startup One Concern.