Climate change and risk management for small businesses

Climate change can present a risk for small businesses in New Zealand, and that risk is increasing. Whilst government and business are working to mitigate its effect and reduce its impact, we also need to prepare for and adapt to our changing climate.

Recent weather events have highlighted its impact on small businesses, causing disruptions to supply chains, operations and staff. This can be challenging for SMEs in New Zealand as they tend to be less equipped to manage than large corporations that are able to dedicate more money, resources and time to the issue. 

So, what can you do to mitigate, plan and prepare for climate-related risks to your business? 

5 climate change risk assessments for small businesses

The first step to understanding how climate change can affect your businesses is to do a risk assessment.

We can help. At Marsh, our experts conduct comprehensive risk assessments to help businesses find their potential environmental risks and vulnerabilities. Factors like your location, industry and supply chain are an important part of this.

Be aware of these five key risks:

1. Physical risks

Extreme weather events like flooding and storms can impact your supply chain, operations and workflow. This could be a direct impact – like your warehouse being damaged in a storm, or it could be indirect, for example, a flood washing out a bridge, which means you don’t receive a shipment.

Also, consider the long-term effects of rising temperatures, heatwaves and droughts.  All of these may change crops, affect agribusinesses and impact on those who use or sell fresh produce. Sea level rise and landslips are also factors you may need to plan for.

2. Transitional risks

The financial and regulatory landscape is changing as New Zealand (and the world) transitions to a low-emissions economy. New laws and regulations require businesses to reduce greenhouse gas emissions and improve sustainability standards.

Energy costs are rising. Although transitioning to lower-emissions operations can cost upfront (for example, purchasing new equipment, adapting your product design or insulating a building better) – it could save you money long-term.

Consumer demand is changing too. Research suggests that almost half of New Zealand shoppers will no longer buy from a company that is not behaving sustainably.¹

These factors are challenging for small businesses. Think about where in your business you might need to invest money and resources to mitigate increasing costs, changing rules and changing attitudes.

3. Reputational risks

Customers are increasingly factoring in sustainability to their purchase decision-making. Businesses not seen or communicating positive action toward better sustainability, risk damaging their reputation. Stakeholders and consumers are wary of ‘greenwashing’, and businesses are expected to do more than simply switch halogen light bulbs for LED ones.

Bad press from an environmental incident or a poor response to a climate-related event, can also have an impact on a business’s reputation and market value.

Similarly, if the quality of your service or product is negatively affected by a disruption in your supply chain or by our changing environment, that’s a reputational risk too.

4. Litigation risks

There are multiple areas in which businesses could face climate change-related litigation:

• failing to meet laws, regulations or legal duties
• a physical consequence of climate change, that negatively affects another party
• contributing to climate change.

Though court cases relating to these are rare (and mostly levelled at large businesses or government), small businesses should still be aware of potential litigation risks as well as the reputational damage that may come with an allegation.

5. Health risks

These affect us all; rising temperatures, air pollutants and diseases can have an impact on our health and the health of our workforce and communities. For example, an office may have to alter its operating hours in a heatwave where extreme temperatures risk the health and safety of its employees.

How to build climate resilience

Adapting to climate change can be challenging for small businesses. However, ignoring the effects and delaying important decision-making could affect your long-term profitability.

Your business risks will be unique to your business, so your plan to build climate resilience should be too.

The first step is to conduct a comprehensive risk assessment to identify your climate risks and develop a strategy for climate resilience and mitigation.

Our experts can help you develop a climate change risk management strategy. The ESG Risk Rating self-assessment tool is another good place to start. Using internationally recognised frameworks, it enables you to measure your organisation’s environmental, social, and governance performance, improve your ESG risks, and gain access to risk and insurance benefits.

The report gives you an overall score, a risk rating for each component and recommendations for controls, reporting and resilience. 

Developing a sustainability strategy

Once you have completed a climate risk assessment, you should develop your business’s sustainability strategy.

Think about how you might achieve this; through introducing a renewable energy supply, implementing energy efficiency measures, improving the ESG score of your supply chain, and reducing waste.

Your strategy could also include disaster recovery and a plan to ensure business continuity should you be affected by a flood, storm or unexpected event.

Investing in longer-term preventative measures, like flood protection, a backup power source, or even transitioning to a less vulnerable area, is also worth considering.

Finally, talk to your insurance broker. Marsh offers tailored insurance options for small and medium enterprises facing environmental risks. Coverage options include property insurance, business interruption insurance, and environmental liability insurance, providing financial protection in the event of environmental-related losses.

While climate change and the operational and financial risks this poses might feel overwhelming, there are simple actions small businesses can take to protect themselves and the environment, so make a plan and take manageable steps toward being more climate resilient. 

Seeking professional advice and developing your climate action plan could empower your business to be prepared, resilient and able to thrive in changing conditions. 

Sustainability Guides Consumer Purchases as Confidence Retreats, EY, 2022