As I write this, I’m reading that the death toll has climbed yet again after “thousand-year” rains dumped 6.9 trillion gallons of water on Louisiana in what the Red Cross is calling the country’s worst natural disaster since Hurricane Sandy. I’m reading that 20,000 people have been rescued, 11,000 have stayed in shelters, and that 60,000 homes and as many as 80,000 structures have been damaged in the floods. As of August 17, the death toll had risen to 12.
Patients were evacuated from medical facilities, phone and wireless services were interrupted, more than 280 state roads had been closed, and around seven in 10 businesses lacked flood insurance. These numbers may well change by the time you read this. In any case, it’s a tragic situation, to say the least.
Meanwhile, I have on my desk a new white paper on the topic of extreme precipitation and increased flood risk that a changing climate will almost certainly deliver. “Extreme events have the greatest potential to produce natural catastrophes that affect businesses, jobs and economies on a regional or global scale,” the white paper says.
Businesses, jobs and economies? As CFOs, that’s our scope of responsibility.
The white paper warns the reader to expect wet areas of the country to become wetter and dry areas drier. Certain regions of the United States can expect a higher risk of flooding. While annual precipitation volume won’t necessarily change, it could come in bigger doses (that is, rain may be less frequent but more intense). Other regions will likely see less precipitation, prolonged droughts, and a potentially increased risk of wildfires.
But we’re CFOs, not a meteorologists. Why should we care?
Well, when a disaster strikes, it doesn’t matter if it’s climate-related or not. The bottom line is at risk. Extreme wet or dry conditions can affect profit-generating buildings, machinery, data centers, transportation networks, supply chains, people, and sales. And though sales and revenue might be insured during a business interruption, longer-term market share, shareholder value, reputation, brand and customer confidence will not be. If anyone wins in a catastrophe, it will be resilient companies. Resilience requires preparation. Those who fail to prepare will lose.
This is precisely what we saw in the Thailand floods. Analysts have cited the Thai floods as the primary reason for Seagate Technology recapturing the worldwide lead in hard disk drive (HDD) shipments in the last quarter of 2011. Because Seagate’s HDD manufacturing plant in Thailand was located on high ground, the company was less adversely affected by the floods, and it was able to continue supplying hard drives when its competitors could not, which led to market leadership. If a similar event took place in China’s Pearl River Delta, where much of the world’s electronics are manufactured, one typhoon could paralyze the world.
What We Can Control
So will your company be a victim of business-crushing flood or drought as climate change brings more volatility to the world?
Unfortunately, you can’t make any easy assumptions about the risk based on your company’s general geography. While climate forecasting models can simulate precipitation over thousands of kilometers, they’re less effective on more localized scales. “Microphysical processes are critical,” says the paper. “Small changes in them make a huge difference.”
Again, CFOs are not meteorologists. Nor are they facility managers. But there are a few things finance teams should be thinking about to ensure business continuity:
Be mindful of where you site new plants, factories, and offices. When you have a choice, you should try to site your facilities in nothing less than 500-year flood zones (where there’s only a 1-in-500 chance of a flood every year). This doesn’t always require major changes in plans. A slight relocation or modification will often move a location from a 100-year to 500-year flood protection level. When viewed over the lifetime of a building or mortgage, the risk is significantly reduced.
Shore up existing facilities. Make sure your people are thinking beyond sandbags and are up to speed on the new generation of flood barriers, inflatable and otherwise. They should also be moving vital equipment to a higher level and creating teams to plan for emergencies.
Know the risk. The U.S. Federal Emergency Management Agency (FEMA) has public flood maps that facilities people should be aware of. But if the maps don’t reflect recent urban development, which can dramatically affect drainage, they’re outdated.
Sharpen your company’s focus on water. Make sure the company is protecting water supplies, diverting water from property, and optimizing drainage.
Remember supply chains. Think: where are key suppliers and customers located? How vulnerable are they to volatile storms, floods, and droughts? What would a catastrophe in their region, climate-driven or not, do to your business?
Diversify. If all of your key suppliers are in the same flood zone, you could be out of luck when the inevitable happens.
Consider transportation. Your company may be among the resilient ones that endure a flood unscathed. But is there a plan for moving goods, services, products, and people to and from your facilities if a road or bridge is washed out? Your people can synch up with local emergency officials to develop alternative routes.
Don’t rely on your gut. The white paper warns of “generational memory threshold,” where a community’s collective memory may well be too short to remember the devastation of a category 5 hurricane that struck, say, 110 years ago. Consider the worst case.
Don’t deny. Climate change denial is prevalent and can be especially risky for a corporation. That’s because it can lead to a failure to prepare. And a lack of preparation means vulnerability, which can have costly, tragic circumstances — as, sadly, property owners have seen too often.
The climate is changing. Don’t let it change your business.
Jeffrey A. Burchill is CFO of FM Global, one of the world’s largest commercial and industrial property insurers.