The past year has seen some of the most destructive climate catastrophes on record. Wildfires, hurricanes and floods are happening at an alarming frequency, with a huge impact on human lives and a significant financial cost.
The Los Angeles wildfires, which have killed at least 25 and have displaced tens of thousands, are the latest in a long list of extreme weather events that include the large-scale flooding in Europe last year and devastating hurricanes across the Caribbean. In economic terms, these events caused global losses of $320 billion in 2024, according to the latest report from reinsurer Munich Re, published last week.
Stores and homes are burning across Los Angeles as fires cause unprecedented destruction. We spoke to those dealing with the fallout.
While the immediate priority is to protect the people and the animals suffering from the direct impacts of these events, businesses are also taking stock. The impacts to supply chains, production facilities and raw materials sources are relatively well documented. But the fashion industry’s sprawling retail footprint, which tends to concentrate around major cities and popular holiday destinations, is also being hit hard by extreme weather, resulting in risks to store employees and financial losses from damage to buildings and inventory.
Many fashion retailers justify their continued presence in volatile or risk-prone climates on the basis that store damages and losses are absorbed relatively easily, climate risks materialise infrequently and the insurance machine is well oiled enough to allow for quick payouts and recovery efforts. But as climate events become increasingly frequent, a cottage industry is emerging of so-called weather risk analysts. Their aim is to help retailers map their climate risks and adapt their retail strategies accordingly, both to minimise physical exposure to risks and to maximise sales throughout extreme weather events and slower climate changes.
“Weather volatility is the least understood, measured and acted upon external factor for retail businesses today,” says Evan Gold, executive VP of global partnerships and alliances at one such weather analytics consultancy Planalytics, which co-authored a report on climate-proofing retail with US trade body National Retail Federation (NRF) in June. Per the report, the weather — either extreme events, slower shifts in climate or increased volatility — directly influences $1 trillion in retail sales annually across sectors (meaning sales are delayed, diverted or altogether lost).
Whether these risks will redraw the retail map is a “board-level decision”, says Gold. But executives may not be able to ignore the risks for much longer, as extreme weather becomes more frequent and intense. And the LA wildfires show that insurance is not the surefire safety net it once was.
Rising up the priority list
Damage to retail stores has been relatively minimal in comparison to the impact of extreme weather events on supply chains, so for now the latter is where most retailers remain focused.
However, experts say the focus could shift in the future if reporting on climate risks to physical retail becomes mandatory in more countries. This is already the case in the European Union, where new rules come into play for 2024 financial reports, the first of which will be published this coming earnings season. It is also being fiercely debated in at least 14 other jurisdictions worldwide, albeit with pushback from some policymakers and the private companies affected because of the cost and complexity of reporting these risks, as well as the lack of standardisation between regulations.
In the US, the Securities and Exchange Commission (SEC) has proposed a regulation, which would require companies traded on US stock exchanges to disclose climate-related risks that could have a material impact on their businesses, pulling impacts on physical retail up the priority list.
An insurance industry crying out for reform
Another factor that could push the impact on retail up the agenda is the question of insurance.
When disaster strikes, the first priority is ensuring people’s safety. Once the immediate emergency response is underway, attention often turns to rebuilding and recovery. That’s when the insurance industry kicks into gear — in theory. But before the dust had settled on the Los Angeles wildfires, when evacuations and emergency responses were still underway, a hidden scandal emerged. Home and business owners reportedly discovered that their insurance policies had been quietly rolled back, and in some cases, rescinded completely.
“In California, some big insurers have stopped covering wildfires. We are worried this will happen in Europe, too,” says Dr Marie Scholer Mendez, a senior expert on policy and sustainable finance at the European Insurance and Occupational Pensions Authority (EIOPA). She points to insurance premium increases across Europe following flooding — notably the flash floods in Valencia in October, and similar events in Germany in 2003, 2013 and 2024.
Looking at historic climate-related natural disasters in Europe, EIOPA estimates that only 25 per cent of losses were covered by insurance (this includes individual, business and broader losses). As extreme weather events increase in frequency and intensity, this “insurance protection gap” is widening, says Scholer Mendez.
In November, EIOPA published its insurance protection gap dashboard, which tracks the insurance gap and recorded losses across different countries and climate risks, hoping to improve climate resilience and recovery times. In northern Europe, the major risks are flooding and windstorms. Southern Europe — which tends to have lower rates of insurance because of the high premiums and people underestimating climate risks — suffers more from wildfires and earthquakes.
“The climate risks vary across European countries, but so do the insurance sectors,” says Scholer Mendez. “In Germany, the private insurance sector reigns. In France, there is a public insurance scheme, with a flat premium rather than a risk-based premium. In Italy, there is an ongoing debate about whether to make natural disaster insurance mandatory for commercial businesses.”
Making insurance mandatory comes with its own challenges. Namely, how to keep prices down. One of the best ways to do this is to curb climate risks upfront, says Scholer Mendez. Along this vein, EIOPA is increasingly pushing the concept of “impact underwriting”, whereby insurers take a more active role in preventing damages (and therefore minimising payouts) ahead of time. Before offering to cover a new building, insurers would send a risk engineer to conduct an on-site assessment of the climate risks, and advise the owner or renter on mitigation and adaptation strategies. This could range from upstream adjustments that minimise a company’s greenhouse gas emissions, to downstream efforts including distancing buildings from particularly flammable vegetation, training retail staff in disaster response, adding flood barriers to stores, or moving electric cabling from the floor to the ceiling to increase flood resilience.
If these strategies were implemented, the insurance premium would come down. “We have to train people, and we have to give them incentives to act,” Scholer Mendez adds. “The ideal scenario is that we reduce the risk.”
Ultimately, experts point out that the fashion industry is a major contributor to the climate crisis, so while considering the risk to store networks and insurance policies, retailers should also be looking at how to dramatically reduce their environmental impacts upstream and down. When it comes to extreme weather and climate change, even small changes can make a difference. “There continues to be a huge opportunity for apparel brands to reduce the carbon intensity of the value chain and the broader impacts of consumption,” says Berkley Rothmeier, director of consumer sectors at sustainable business network BSR. “We might have passed certain tipping points but that doesn’t mean [climate change] won’t get worse. Every molecule of carbon dioxide we keep out of the atmosphere helps.”
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