Understanding the business risks of extreme weather

Extreme weather events are no longer rare or isolated occurrences. They are happening with increasing frequency and intensity, amplifying flood, fire, and wind-related risks, and leaving communities and businesses struggling to recover. Without adequate preparation, a single disaster can lead to devastating financial losses, or even force permanent closure, for small to medium-sized businesses.

In 2024, the U.S. experienced 27 individual natural disasters that caused at least $1 billion in economic losses. This includes damage caused by the catastrophic Hurricanes Helene and Milton, which led to widespread destruction across the southeastern U.S. Sixty percent of Florida’s small businesses were caught in Milton’s path and 45% of North Carolina’s small businesses were hit by Helene. As the impacts of extreme weather worsen, preparation is vital to ensure businesses remain resilient.

Bank of America has embedded climate risk considerations into its enterprise risk processes, and the same approach can be valuable for businesses of all sizes. Taking proactive steps today to assess exposure and build resilience can help protect operational continuity and financial health against future challenges.

So, what can businesses do to prepare for more severe weather? It starts with understanding a business’s risks and assessing the potential consequences of operational disruptions.

Identifying potential disasters

Knowing which disasters are most likely to affect your business is a critical first step for maintaining resilience. The risks associated with natural disasters vary significantly based on location. For example, evidence suggests that businesses across California will need to plan for droughts, earthquakes, and severe heat, while companies based in the Midwest will face extreme temperatures, harsh winter weather, strong winds, and tornadoes. Infrastructure and industry also factor into risks – companies with on-site servers would likely need to take greater precautions against flooding than ones using cloud computing.

By identifying a business’s specific disaster risks, one can take proactive measures to protect assets, employees, and operations. Resources like the Federal Emergency Management Agency’s National Risk Index for Natural Hazards offer methods for businesses to gain a clearer understanding of potential risks. This interactive tool shows which communities are at greatest risk to natural hazards and provides data on expected annual losses, social vulnerability, and community resilience.

It’s also important to individually evaluate each location – city, county, and state – where a company operates. This includes the physical locations where assets, like computer servers, are housed and the areas employees commute from or work remotely. Additionally, consider non-weather-related events that can affect a business, such as cyberattacks, equipment failure, personal injuries, and health crises.

Equally important is evaluating the location of key vendors. Businesses should have contingency plans that include alternate vendors—preferably in different regions—to reduce geographic risk should those partners be affected by extreme weather or other disruptions.

Once risks have been found, the next step is to assess their potential impact. Begin by examining the likelihood and severity of each disaster. For example, how would a flood impact physical assets like buildings or equipment? How might a power outage or severe storm affect employees and operations? Evaluate the potential financial, operational, and reputational losses tied to each risk. Systematically analyzing these factors will help determine which risks pose the greatest threat and help you develop tailored strategies to mitigate them.

Conducting a business impact analysis

A business impact analysis (BIA) provides a structured approach to identify and assess vulnerabilities that may arise during a disaster. The purpose is to figure out which business functions are essential so you can develop strategies for maintaining or quickly restoring these functions during a disaster.

A BIA involves four actionable phases:

1. Identifying critical business processes. For each process, collect information on where it’s performed, its inputs and outputs, typical duration, past disruptions, and metrics to measure the impact of disruptions, such as operational downtime, financial losses, and reputational damage.
2. Assessing the potential impact of these disruptions. Consider factors such as how long a process can be disrupted before causing significant loss and the target recovery time. This allows you to understand the severity of potential risks.
3. Prioritizing processes based on the level of severity and the consequences of their failure. Address high-priority processes—those essential to operations—first to ensure resources are focused where they are most needed during a disruption. These may include factors such as financial losses, reputational risks, and safety concerns.
4. Documenting findings. Keep detailed records to help ensure that all potential vulnerabilities are accounted for and can inform the development of contingency plans.

The BIA process not only finds business vulnerabilities but also provides valuable insights for prioritizing and making proactive decisions. To help businesses conduct these analyses, the U.S. Department of Homeland Security offers a BIA questionnaire template companies can use to survey managers and other leaders within their businesses.

By understanding the potential impacts of disruptions—from hurricanes, floods, and winter weather to earthquakes, tornados, and wildfires—businesses can develop strategies to mitigate crisis, allocate resources effectively, enhance business resilience, and ensure the continuity of operations in the face of disasters.

The ability to anticipate disruptions and adapt quickly is becoming a defining trait of successful businesses. A strong BIA gives business owners the foresight and flexibility they need not just to respond to emergencies, but to adapt, recover, and continue growing in an increasingly evolving world.