As Climate Risk Grows, So Will Costs for Small Businesses

To address growing climate risks, businesses will have to set aside an increasing share of their cash flows. Hurricanes, wildfires, and the rise in sea levels impose costs on firms, both in preparation and response to these disasters. As the risks grow, those costs are only going to increase over time.

Risk management can help minimize the cost of climate change. Robust risk management strategies layer financing tools ­­— insurance, reserving, and borrowing — to address different aspects of the risk. Doing so facilitates recovery by providing businesses the funds they need when disaster strikes.

But investing in risk management also imposes immediate costs. Insurance requires upfront premium payments. Cash reserves require keeping funds set aside for a rainy day. Planning to fund repairs with credit requires businesses to maintain financial flexibility — keeping enough slack in their finances to access a loan in the future.

As a result, cash-strapped…

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This article was written by Benjamin Collier and originally published on hbr.org