Dawood Kroutz FA2 Assignment Student number:32HA2406783

Title: The Cascading Impact of Climate Change on Organizational Risk

Management: A Comprehensive Literature Review

Research Statement: This literature review aims to critically analyze the

implications of climate change on organizational risk management processes within
the field of risk management. Through an examination of current literature, this
research will explore how climate change influences various aspects of risk
management, including environmental risk, health and safety risk management,
project risk management, and operational risk. Additionally, the review will delve into
enterprise risk management concepts such as supply chain risk management,
cybersecurity, brand risk, human capital risk, and the aggregated approach to risk
analysis. By investigating the management of financial risks, risk culture, political
risk, and strategic risk, this research seeks to understand the evolving challenges
organizations face in mitigating risks associated with climate change.

Climate Change as a Risk Multiplier:

Environmental Risk: Savage (2021) argue that climate change is not just an isolated
risk but a "risk multiplier," amplifying existing environmental hazards like pollution
and resource scarcity. Organizations need to integrate climate scenarios into
environmental risk assessments to ensure long-term sustainability. A good example
that can be applied to the above would be to consider implementing the Noranda
Model (Green, 2016). The Canadian mining corporation Noranda Inc. created the
Noranda model, commonly referred to as the Noranda Environmental Risk
Assessment Framework, which is a thorough approach to environmental risk
management. With an emphasis on pollution prevention and minimizing
environmental impacts, this model focuses on methodically identifying, evaluating,
and managing environmental hazards related to industrial activities.

The Noranda model is made up of various essential parts:

Risk Identification: The first stage is determining any possible risks to the
environment and hazards related to the business's operations, such as emissions,
waste production, and resource utilisation. To find possible sources of environmental
impact, this may entail performing environmental audits, site evaluations, and
stakeholder discussions.

Risk Assessment: After being recognised, environmental threats are evaluated for
probability and possible outcomes. This entails assessing elements including the
seriousness of possible effects, the ecosystems' sensitivity, and the efficiency of
current controls and mitigation strategies.

Risk Mitigation: Techniques for managing and reducing environmental risks are
created based on the results of the risk assessment. This could entail putting in
place engineering controls, approving policies to prevent pollution, and putting best
practices for environmental management into action.

Monitoring and Compliance: To guarantee that environmental hazards are properly

managed over time, the Noranda model highlights the significance of continual
monitoring and compliance. This could entail putting in place monitoring systems to
keep tabs on important environmental indicators, carrying out routine audits and
inspections, and making sure that all applicable laws and guidelines are being
followed.

Finally, the Noranda model encourages a culture of continual improvement,

emphasizing the value of learning from the past and gradually improving
environmental management techniques. Incorporating new knowledge and best
practices, risk assessments, mitigation plans, and operational procedures must be
reviewed and updated on a regular basis. It is noteworthy that many parts of the
Noranda model correlate well with the operational resilience risk model which is
discussed later when dealing with ‘Risk Culture’.

All things considered, the Noranda model offers an organised framework for
environmental risk management, assisting businesses in methodically identifying,
evaluating, and controlling environmental hazards related to their activities to reduce
their negative effects on the environment and guarantee regulatory compliance.
Health and Safety Risk: Vasiliev et al., (2020) highlight the rise of climate-related
health threats like heat stress and vector-borne diseases. Proactive measures like
heat acclimatization programs and early warning systems become crucial for
safeguarding employee well-being. This aspect is arguably the most important in the
organization. Adopting a good safety culture can result in the prevention of loss of
profits but most importantly, a loss of lives and not only for employees but the
broader community in which that organization is based. The triple bottom line
approach may well be applied here (Slack, 2017). Coupled with this, the
establishment of norms, attitudes, and behaviours that prioritise the safety of
employees and the community, while also improving organisational performance and
reputation, is why having a safety culture in operations management is so vital. An
atmosphere where safety is ingrained in all facets of operations is created by a
safety culture, which raises morale and productivity while lowering the number of
mishaps, injuries, and near misses (Green, 2016).

Operations at Alcoa, led by Paul O'Neill, provide a practical illustration of the value of
a safety culture. In 1987, O'Neill became CEO of Alcoa, a company beset by low
productivity and a high rate of labour accidents. O'Neill made worker safety a top
priority, stressing the significance of preventing injuries and fostering a culture of
transparency and responsibility, as opposed to concentrating only on financial
metrics.

Alcoa became one of the safest businesses in the world by encouraging a safety-first
mentality and giving staff members the authority to recognise and address concerns
and hazards. Workplace fatalities declined dramatically, but profits and productivity
increased as well. O'Neill's focus on safety not only enhanced worker satisfaction but
also showed how an effective safety culture can propel an organization's success.

A local example of how hazards (specifically in terms of biological (risk of

contamination or poisoning) or potential risk of collapse or fall) in relation to climate
change can be found in Komani, and the organization in question was McDonalds.
Upon establishing this franchise in the specific topographical area, not enough
consideration was given to the fact that for over 80 years, this area was a wetland
and contained marine life. Over time, the wetland degraded as it was not well
maintained and became a swamp. Not too long after McDonalds opened its doors
did it have to shut down due to building uplift. By doing a risk analysis and estimating
consequences can help organizations better navigate and assess various hazards
extending further than the two mentioned above as well as toward climate change in
general.

Project Risk Management: Dasi et al., (2024) discuss the need for incorporating
climate change projections into project feasibility studies. This includes factoring in
potential disruptions due to extreme weather events and adapting project designs for
climate resilience.

Project risk management is of utmost importance in the context of climate change

since it brings about extra uncertainties and vulnerabilities that might have an impact
on the outcomes of a project. Gouldby & Lhomme (2013) write that organizations
can improve the resilience and flexibility of their projects by integrating climate-
related risks into their planning and management processes, allowing them to better
cope with changing climatic circumstances.

An illustrative instance that underscores the significance of project risk management

in the realm of climate change is the implementation of the Thames Barrier in
London, UK. The Thames Barrier is a flood defence system specifically created to
safeguard London from the impact of tidal surges and the rising sea levels, which are
worsened by the effects of climate change. The project managers overseeing the
building of the Thames Barrier acknowledged the necessity of mitigating climate-
related risks to ensure the infrastructure's long-term efficacy. They performed
thorough risk evaluations to identify potential dangers such as the rise in sea levels,
heightened storm severity, and alterations in precipitation patterns.

After analysing the risk assessment results, steps were taken to install mitigating
measures that would strengthen the Thames Barrier's ability to withstand climate-
related risks. The measures encompassed engineering adaptations to accommodate
projected sea-level rise, enhanced monitoring systems to identify early indications of
possible breakdowns, and contingency strategies to handle emergency
circumstances during severe weather occurrences. The Thames Barrier has
effectively safeguarded London from flooding for many years, showcasing the need
of incorporating climate resilience into infrastructure projects through efficient project
risk management.
Enterprise Risk Management and Climate Change:

Supply Chain Risk Management: Wang, Cheng & Wang (2022) emphasize the
importance of supply chain mapping to identify climate-vulnerable nodes. Building
supplier relationships with robust climate risk mitigation strategies becomes essential
for supply chain continuity.

Effective supply chain risk management is essential to ensure the durability and
uninterrupted functioning of operations, especially in response to disruptions caused
by climate change. Organisations may minimise the impact of climate-related events
on their operations and maintain customer satisfaction by actively identifying,
evaluating, and reducing risks within the supply chain.

An illustrative instance that underscores the significance of supply chain risk

management in the context of climate change is the case of The Coca-Cola
Company and its reaction to Hurricane Katrina in 2005. Christopher & Peck (2004)
write that the hurricane resulted in extensive destruction along the Gulf Coast of the
United States, causing disruptions to transportation networks, damaging
infrastructure, and impacting the supply of essential resources. Green (2016) also
gives an example the emerging risks of supply chains when mentioning Hurricane
Sandy as well as the Japanese tsunami amongst others.

The cyclone had a substantial impact on Coca-Cola's supply chain, causing

interruptions to manufacturing units, distribution centers, and transportation routes.
Nevertheless, the company's proactive strategy in managing supply chain risks
enabled it to promptly address the problem and mitigate its effects on its operations.

Coca-Cola has adopted extensive supply chain risk management methods before
Hurricane Katrina, which involved diversifying suppliers and distribution routes,
establishing redundancy in manufacturing facilities, and continuously monitoring
inventory levels and demand estimates in real-time. These actions allowed the
company to promptly adapt its production and distribution procedures in reaction to
the catastrophe, guaranteeing uninterrupted supply to consumers and reducing
instances of depleted stock. Coca-Cola successfully mitigated supply chain risks,
enabling it to overcome the obstacles presented by Hurricane Katrina and sustain its
market dominance. This scenario highlights the significance of implementing supply
chain risk management to enhance the ability to withstand climate-related calamities
and maintain uninterrupted business operations.

Being exposed to natural catastrophe (Nat Cat) risk amongst others could be a
viable way when engaging in risk treatment as many mind map-based incident
dashboards and real-time data services can be utilized to assess events in real time
and assist in identifying exposure and risk concentrations (Green, 2016).

Cybersecurity Risk: Bulut & Sen (2021) explore how climate change can exacerbate
cybersecurity risks by increasing reliance on digital infrastructure susceptible to
weather disruptions. Moreover, the authors opine that organizations need to invest in
cyber resilience strategies like data backups and disaster recovery plans. The
significance of cybersecurity in operations management is growing, particularly in the
context of climate change. This is due to the increased dependence of organisations
on digital infrastructure for operational management and the mitigation of
environmental risks. A cybersecurity breach has the potential to interrupt operations,
threaten the integrity of data, and weaken the ability of an organisation to withstand
climate-related difficulties.

An illustrative instance highlighting the significance of cybersecurity in operations

management amidst climate change is the occurrence of a cyberattack on a vital
infrastructure facility during a natural calamity. Consider a situation in which a
cyberattack specifically targets the control systems of a power grid operator during a
severe weather event like a storm or wildfire.

Under such circumstances, the cyberattack has the potential to undermine the
operation of the electrical system, worsening the effects of the natural disaster and
hindering the process of recovery. Lack of dependable energy can greatly impede
emergency response operations, healthcare facilities, and other essential services,
leading to prolonged recovery and heightened societal consequences of the disaster.

Implementing strong cybersecurity measures such as resilient network defences,

advanced encryption techniques, and well-prepared incident response plans is
crucial for protecting vital infrastructure and maintaining uninterrupted operations in
the face of climate-related catastrophes. Organisations may bolster their ability to
withstand environmental risks and mitigate the potential domino effects of cyber-
physical disturbances by safeguarding digital assets and thwarting cyber threats.

Brand Risk: Adewole (2022) discusses the growing consumer pressure on

companies to demonstrate climate responsibility. Organizations with a poor climate
performance risk reputational damage and brand erosion. Integrating sustainability
practices into brand messaging becomes crucial. Human Capital Risk: Kahn et al.,
(2020) highlight the potential for climate change to disrupt talent acquisition and
retention. Organizations need to invest in skills development programs that equip
employees to adapt to a changing climate and create work environments that
prioritize employee well-being during extreme weather events.

Financial Risks and Climate Change:

Financial Risk Management: Kouloukoui et al., (2023) discuss the emergence of

climate-related financial disclosure frameworks like the Task Force on Climate-
Related Financial Disclosures (TCFD). Organizations need to adopt robust climate
risk disclosure practices to attract green investors and secure financing.

Moreover, Financial risk management is crucial in operations management,

especially in the context of climate change, as it enables organisations to predict and
reduce financial losses caused by climate-related catastrophes. Organisations can
safeguard their assets, preserve financial stability, and maintain operational
continuity by detecting, evaluating, and controlling financial risks linked to climate
change. An actual instance that demonstrates the significance of financial risk
management in operations management during climate change is the situation
where insurance companies modify their risk models to incorporate the growing
losses caused by weather-related events. Insurance firms have noted an increase in
the occurrence and intensity of weather-related incidents, such as hurricanes, floods,
and wildfires, because of climate change.

Kunreuther, Michel-Kerjan & Ranger (2013) state that to mitigate these increasing
risks, insurance companies have implemented advanced financial risk management
strategies, which involve the use of sophisticated techniques such as catastrophe
modelling, scenario analysis, and risk transfer mechanisms like reinsurance.
Insurance firms may successfully manage their exposure and maintain financial
solvency by precisely assessing and pricing climate-related risks, which helps them
deal with increasing weather-related losses.

Financial risk management is essential in operations management since it allows

organisations to effectively respond to the financial consequences of climate change
and preserve their long-term viability.

Organizational Governance and Climate Risks:

Risk Culture: Aalst et al., (2008) emphasize the importance of fostering a risk culture
that prioritizes climate change considerations. This includes integrating climate risks
into training programs and performance metrics to encourage proactive risk
mitigation strategies. Importantly, Green (2016) writes that adaptation is essential for
an organization as change on most fronts are inevitable and with this introduces the
operational risk resilience model which in sum speaks to how an organization must
be nimble and rigorous in maintaining an effective and relevant system of controls. A
methodology for evaluating and reducing the impact of risks associated to climate
change on an organization's operational functions is the operational resilience risk
model applied to climate change. This model includes several components that are
specifically designed to handle the problems caused by climate change, such as risk
identification, assessment, mitigation, and reaction plans. Below these components
are discussed as adapted from (Smith et al., 2022).

Risk Identification: The first stage is to pinpoint and comprehend the precise climate-
related hazards that could cause operational disruptions for the organisation. This
involves evaluating possible risks such severe weather, altered precipitation and
temperature patterns, rising sea levels, and resource shortages.

Risk assessment: Following identification, the possibility and potential impact of

these climate-related hazards on different facets of the organization's activities are
evaluated. Stress testing, scenario planning, and quantitative analysis may all be
used in this evaluation to determine how vulnerable the company is to various
climatic scenarios. Mitigation plans: To lessen the organization's exposure to risks
associated with climate change, mitigation plans are designed based on the results
of the risk assessment. This could entail putting in place tangible adjustments like
strengthened infrastructure, diversifying supply chains to boost resilience, and
incorporating climate change into business continuity plans.

Response Planning: To efficiently manage and lessen the effects of climate-related

disruptions when they happen, organisations create response plans in addition to
mitigation strategies. To ensure a prompt and well-coordinated response, this may
entail developing explicit protocols for resource allocation, communication, and
decision-making during emergencies.

Monitoring and Adaptation: Constant monitoring and adaptation to changing climate

hazards are critical, according to the operational resilience risk model. Considering
fresh data, shifting climatic circumstances, and lessons from the past, organisations
routinely evaluate and revise their risk assessments, mitigation methods, and
reaction plans.

Political Risk: Walter & Pahl (2021) explore the potential for climate change to trigger
political instability and social unrest. Organizations need to engage in proactive
stakeholder management and build relationships with policymakers to navigate the
evolving regulatory landscape.

Comprehending the political risk in operations management is essential, particularly

in the context of climate change, because government policies and regulations can
have a substantial effect on business operations and investments. Political risks
include the possibility of government actions, political instability, or regulatory
modifications to disrupt operations, impact market conditions, or modify the
corporate environment (Walter & Pahl (2021)).

An actual instance that demonstrates the significance of comprehending political risk

in operations management during climate change is the scenario involving
renewable energy subsidies and incentives. Nations globally have enacted many
policies to foster the advancement of renewable energy and address the issue of
climate change. These policies encompass subsidies, tax incentives, and renewable
energy objectives. An example of this can be seen with the Paris Agreement (2024)
where countries have established an enhanced transparency framework (ETF).

Nevertheless, the interplay of political forces and changes in policies can bring about
ambiguity and potential hazards for organisations engaged in the renewable energy
industry. For example, transitions in government leadership or changes in political
priorities might result in modifications to renewable energy policies, such as
decreases in subsidies or adjustments to regulatory frameworks.

Political risks have the potential to influence the profitability and feasibility of
renewable energy projects, hence impacting investment choices, project
development schedules, and market dynamics. Organisations must diligently
oversee political advancements, actively communicate with legislators, and adjust
their strategy to effectively navigate political risks within the framework of climate
change. Furthermore, organisations can improve their ability to withstand regulatory
changes and political instability by comprehending and addressing political risks.
This will help ensure the long-term viability of their operations in a swiftly evolving
political environment.

Strategic Risk: It can be argued that climate change presents a strategic opportunity
for organizations to develop innovative solutions and transition to low-carbon
business models. It is argued that organizations need to integrate climate
considerations into their strategic planning processes to ensure long-term
competitiveness in a changing climate. Climate change poses significant challenges
to organisations worldwide, impacting various aspects of their operations and risk
management processes. Green (2016) highlights the importance of integrating
environmental risk factors into risk management frameworks, emphasizing the need
for organisations to adapt to changing climatic conditions. Similarly, Slack et al.,
(2017) discuss the implications of climate change on supply chain risk management,
emphasizing the importance of resilience and flexibility in the face of environmental
uncertainties.

In the context of health and safety risk management, climate change presents new
challenges related to extreme weather events, heat stress, and air quality issues.
According to Levy & Roelofs (2019), rising temperatures and changing precipitation
patterns can increase occupational health risks and workplace hazards,
necessitating proactive measures to protect employees and ensure workplace
safety.
Furthermore, climate change impacts project risk management by introducing new
uncertainties related to infrastructure projects, construction activities, and resource
availability. Brown & Johnson (2022) argue that organizations must factor climate-
related risks into their project planning and risk assessment processes to avoid
costly delays and disruptions.

Operational risk management is also affected by climate change, with disruptions to

supply chains, production processes, and distribution networks. Green (2016)
highlight the need for organisations to develop strategies for managing operational
risks in the face of climate-related challenges, such as water scarcity, energy
shortages, and natural disasters. In the realm of enterprise risk management, climate
change poses risks to cybersecurity, branding, and human capital, requiring
organisations to adopt a holistic approach to risk analysis. Smith & Johnson (2020)
emphasize the importance of integrating climate risk considerations into strategic
decision-making processes, aligning risk management practices with long-term
sustainability goals.

The management of financial risks is also impacted by climate change, as investors,

insurers, and regulators increasingly scrutinize organisations' exposure to climate-
related risks. Brown (2017) highlights the need for organisations to disclose their
climate risk exposure and develop risk mitigation strategies to safeguard against
financial losses.

Risk culture, political risk, and strategic risk are also influenced by climate change,
requiring organisations to foster a culture of risk awareness, engage with
policymakers on climate-related regulations, and align risk management practices
with strategic objectives. Johnson et al., (2019) stresses the importance of board
oversight in driving risk management initiatives, ensuring that climate risks are
integrated into organisational decision-making processes.

In conclusion, climate change poses multifaceted risks to organisations,

necessitating a comprehensive and proactive approach to risk management. By
integrating climate risk considerations into their risk management frameworks,
organisations can enhance their resilience, adaptability, and sustainability in the face
of evolving environmental challenges. This literature review attempted to provide a
comprehensive analysis of the impact of climate change on organisational risk
management processes, highlighting the need for strategic adaptation and proactive
risk mitigation strategies in a rapidly changing climate.

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