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Anticipated financial impacts

Putting numbers to climate risk – anticipated financial impacts (AFIs): A practical business discipline

How much should a business invest to protect a critical site? Would alternative supply chain partners reduce potential disruption to your business? Could raising electrical equipment prevent a costly shutdown?

These are familiar risk management and investment questions. Assessing anticipated financial impacts (AFIs) gives businesses a clearer basis for answering them.

Although AFIs are often discussed through the lens of New Zealand’s climate disclosure requirements, their value extends to any business making decisions about assets, operations and capital. Understanding potential losses, recovery costs and disruption helps companies weigh the cost of resilience against the consequences of leaving risks unaddressed.

The underlying methods are well established. Engineers have spent decades assessing hazards, estimating damage and examining consequential losses, including disruption and lost income. Corporate AFI assessments draw on that experience, using climate scenarios to explore how conditions could change over the life of an investment.

For physical risks, four connected elements underpin the analysis:

  • Hazard: what conditions could occur, how often, and how might climate change alter them?
  • Exposure: which assets, access routes, utilities and suppliers could be affected?
  • Vulnerability: what could fail, and how would that affect operations?
  • Damage and loss: what could repairs, downtime and recovery mean financially?

A flood map is a starting point. Floor heights, equipment locations, replacement lead times and the ability to move production elsewhere all help determine the commercial outcome.

The 2011 Thai floods show how loss can unfold. Toyota’s three Thai plants escaped direct flooding but halted production due to disrupted parts supply. Understanding a business’s dependencies can be as important as assessing its own property.

That requires people who understand both the hazard and the business. Climate specialists, hazard modellers, geospatial analysts and engineers contribute evidence about exposure, damage, recovery and adaptation options. Internally, operations and asset teams identify critical dependencies and practical constraints; finance translates these into margins, cash flow and capital needs. Sustainability teams connect the analysis with scenarios, strategy and transition planning.

The work should be proportionate. A spreadsheet may answer an initial question; more detailed modelling earns its place where it could change a material decision. Importantly, assumptions and uncertainties need to be clear.

Tonkin + Taylor’s new whitepaper explains how these capabilities fit together to support credible AFI assessments and better business decisions.

Read ‘Anticipated Financial Impacts: Putting numbers to climate risk’, by James Hughes and Simon Harvey, here. 

Putting numbers to climate risk – anticipated financial impacts (AFIs): A practical business discipline