A new report finds that failure to implement climate resilience measures now can place businesses on irreversible trajectories towards disastrous physical climate impacts

Following warnings from the Climate Change Committee’s (CCC) third risk assessment report earlier in the year that the UK is failing to adopt resilience measures capable of keeping pace with escalating climate risks, a new study published this week has underlined how small and medium sized enterprises (SMEs) in particular are ‘locking-in’ future climate risks through their current decisions.

The new paper – titled The risk of corporate lock-in to future physical climate risks: the case of flood risk in England and Wales and published on Monday by the Grantham Research Institute, London School of Economics (LSE) – looks at mounting evidence around how businesses are inadvertently increasing their exposure to flood-related risks.

So-called ‘lock-ins’ occur when businesses make strategic or infrastructure decisions that set an organisation on a trajectory towards future risks that are difficult to divert. The CCC expressed particular concern over lock-ins in the latest climate change risk assessment, arguing policymakers, businesses, and investors needed to consider future climate risks when making current decisions so as to limit the risk of significant costs and disruption as climate impacts escalate over the coming decades.

The most obvious future climate risks in the UK relate to flooding and the risks posed to business sites are known to be significant, according to the climate risk assessment, which suggests annual damages for non-residential properties in England are projected to increase by 36 per cent by 2050 and 50 per cent by 2080 under a 2C warming scenario. The report also warns that costs to businesses from flood damage to sites, interruption and indirect losses will build. Based on the current national climate action plans submitted ahead of the COP26 Climate Summit in Glasgow the world is on track for around 2.4C of warming this century, assuming current decarbonisation pledges are met.

The new LSE report reiterates how decisions to do with location, infrastructure, supply chain networks, and core business models for new businesses can ‘lock in’ future climate risks that are costly to reverse. Analysis of Ordnance Survey data shows that nearly eight per cent – 7.82 per cent to be precise – of new business premises in England and Wales were built in medium- or high-risk flood areas.

Under a 2C warming scenario, 10 per cent of business premises built between 2008 and 2018 would be exposed to high or medium level flood riskby the 2050s, which grows to 15 per cent under a 4C warming scenario.

This is despite a Grantham Research Institute survey from last year finding that businesses perceive floods as the most common climate risk. Over 22 per cent of businesses surveyed thought surface water flooding was the most common risk climate risk they face, ahead of heatwaves that were highlighted by 18 per cent of respondents and fluvial and coastal flooding which were named by 14 per cent.

The survey also suggests businesses face a major challenge in assessing climate risks, with over 45 per cent of firms surveyed concerned about climate risks, despite not yet assessing them. As such the paper concludes that SMEs have a ‘blind-spot’ for climate risks owing largely to a limited ability to make effective risk assessments, which is a direct result of them having neither the capacity to assess risks internally or funds to hire external services.

“While larger businesses may be able to afford analyses showing the future risks of flooding, SMEs – which account for 99 per cent  of businesses globally – often lack resources to be able to make these assessments, and therefore prevent themselves from ‘locking-in’ future risks,” said Viktor Roezer, co-author of the report. “As such, smaller businesses may have a blind spot for this and ultimately face being left behind.”

The report finds risk assessment does sometimes occur at SMEs, but such exercises then frequently fail to inform decision making. SMEs also demonstrated a poor understanding of the financial costs of climate risks, with only 13 per cent of businesses impacted by flooding aware of the specific likely costs of damages.

Awareness of climate risks is still an issue, the report also finds, suggesting a gap exists between the degree to which businesses are aware of flood risk and their actual exposure. The authors argue this is a result of limited business capacity to understand site-level risk exposure and poor internal alignment between those tasked with making decisions and those assessing risks.

Swenja Surminski, co-author of the report, said: “It’s worrying that businesses are underestimating physical climate risks. The gaps we found in risk awareness and flood exposure demonstrate the need for urgent action – especially in specific sectors such as manufacturing and finance. Flooding and other weather disruption will have significant consequences for businesses, including site-level damage, asset write-downs, stranded assets and implications for development.”

Lock-ins may be further exacerbated by overreliance on ‘hard engineering’ solutions, the report argues, which demonstrates the need to increase business awareness of a wide-range of adaptation options, such as nature-based solutions. Government efforts have led to significant investment in flood and coastal defences, but wider climate resilience efforts remain heavily criticised by the CCC.

Speaking to BusinessGreen, Roezer said governments can play a role in raising awareness of climate risks among SMEs, but stressed there was a clear case for businesses to undertake their own risk assessments. “If you have this as a standard practice, for example, for your site selection and so on, you would end up having less problems in the future to operate your business, buying insurance and so on,” he advised.

However, Shilpita Mathews, co-author on the report, argued the government could and should better define flooding risks to help inform businesses risk assessments. “Government oversight may be needed here to help businesses with information provision, such as updated surface water flood maps and data granularity at the business premise level,” she said.

The report comes in the same week as a major new study from think tank Localis, which called for development on floodplains to be avoided where possible, and where it is unavoidable, for appropriate flood defences to be constructed, after finding that development in areas of high flood risk remains widespread. The report offered a range of policy recommendations for mitigating future flood risks, including collaborative efforts between government, local authority developers, and insurers to help tackle escalating risks.

There is now a broad consensus that the UK’s climate resilience strategy remains badly underpowered and that flood risks are expected to escalate fast in the coming decades. The government itself admitted that the CCC’s criticism earlier this year was largely justified and that there is a need to further strengthen resilience measures. But significant challenges remain, given how policymakers, investors, businesses, and local authorities all have something of a blindspot when it comes to future climate risks. As ever, those businesses that are clear-eyed about future risks and willing to take relatively modest steps now to avoid costly future impacts are likely to prosper in the long run.

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