A.1. Short-, medium-, and long-term time horizons
Source: CDP C2.1a
Short-term: Within the next five (5) years. Near- term horizon to be the current timeframe through the next three (3) years.
Medium-term: Between five (5) to ten (10) years into the future.
Long-term: Ten (10) to (20) years into the future.
A.2. Specific climate-related issues potentially arising that could have a material financial impact on the organization
Source: CDP C2.3a, C2.4a
Description of Short-term Risks
Through scenario analysis, we have identified climate-related acute physical risks from hurricanes, flooding, or wildfires potentially having a substantive strategic impact on the business in the near- to short-term.
- Category 3, 4 or 5 hurricanes with heavy rain causing moderate, wide-spread riverine/coastal flooding that impacts retail locations, corporate offices, distribution centers, call centers and certain PBM locations. These hazards could result in business interruptions as well as decreased asset value or asset useful life, leading to write-offs or asset impairments.
- Widespread, uncontrollable wildfires that spread from forests to suburban and urban areas affecting our retail locations. This hazard could result in business interruptions as well as decreased asset value or asset useful life, leading to write-offs or asset impairments.
The potential aggregate maximum probable loss (MPL) from these risks, mitigated by insurance, is under $48 million.
In addition to impacting to our own facilities and retail locations, acute and chronic climate-related physical risks may cause business disruption through our supply chain and logistics functions. These issues could impede our ability to provide lifesaving drugs and medical service to our customers and patients, thus posing a potential reputational risk.
Our analysis has yet to definitively identify transitional risks with the potential to cause substantive financial or strategic impact on the business in the short-term.
Description of Short-term Opportunities
As the threats of climate change are realized, our enterprise climate resilience will be increasingly important. The agility that work-from-home and more digital work will allow us to better maintain business continuity during severe climate-related events, allowing us to act as a one stop shop for our customers’ health and safety needs.
Through scenario analysis, the Company has identified short-term climate-related opportunities that stem from wildfires. These opportunities stem from a shift in consumer preferences that may result in increased revenues due to increased demand for disaster preparedness items for wildfires in Arizona, California, Colorado, Nevada, Oregon or other susceptible geographies. The potential financial impact varies widely based on the location, size, frequency and duration of future wildfires but could result in increased revenue of between $50 million and $200 million.
In addition, opportunities to reduce direct and indirect costs in our direct operations in the short-term through Smart Consumption and resilience efforts have also been identified. This opportunity has yielded reduced operating costs, primarily through the reduction in electricity use at our corporate offices and headquarters in Woonsocket, RI. With fewer employees working at our offices, we have been able to reduce our spend on lighting, HVAC, and office equipment, e.g., computers, monitors, and printing. As part of our Smart Consumption plan, we plan to reopen offices at reduced capacity, offering flexible working arrangements with two to three days in office and two to three days remote (40-60% reduction in average occupancy). We expect this ongoing reduction in occupancy to result in continued operational savings.
Description of Medium- and Long-term Risks and Opportunities
Because the frequency and intensity of climate-related events, including hurricanes, flooding and wildfires, is expected to increase due to the ongoing effects of climate change, we expect the number of high-risk locations to increase over the medium- and long-term.
We expect that enterprise resiliency will become increasingly important in the medium- and long-term. Any related financial opportunities may diminish over time.
A.3. Processes used to determine which risks and opportunities could have a material financial impact on the organization.
Source: CDP C2.1b, C2.2
Climate-related risks are included in our multi-disciplinary company-wide risk identification, assessment, and management process. The process for identifying and assessing risks at the Company level is assigned to the leader of each business. Leaders assess risks by quantifying potential impacts in financial terms. When the potential financial impact of an identified risk exceeds the Company’s threshold for substantive or strategic impact, the risk is added to the risk register and become subject to direct Board oversight.
For the purpose of assessing climate risk for our ESG programs, what constitutes a substantive impact is generally determined by evaluating the measurable financial impact against various tempering factors, including the time horizon of the event occurring, the range of uncertainty of the magnitude of the impact, the likelihood of occurrence and our ability to mitigate the risk. In the context of climate-related issues, a measurable (or substantive) financial impact could be considered to be on the order of 50 or more basis points of our Company’s annual net income. There may be cases where climate-related risks do not meet the threshold for measurable financial impact, but an assessment of other factors nonetheless warrants a higher level of oversight.
Each business unit is responsible for identifying, assessing, and managing opportunities that may arise from climate change. Opportunities are capitalized upon if they are deemed profitable, practical and in-line with business strategy. For example, energy efficiency opportunities are primarily identified and assessed in terms of their potential to reduce emissions in-line with our commitment to net-zero greenhouse gas emissions across the value chain by 2050. In conjunction with this analysis, the Facilities unit assesses opportunities in terms of financial impact as part of the planning and budgeting process, generally choosing to capitalize on opportunities that have a reasonable return on investment (ROI).
A.4. Identified risks and opportunities by geography
Source: CDP C2.3a, C2.4a
Risks by Geography
Southeastern United States and Puerto Rico
High risk clusters for hurricanes were identified along the Gulf of Mexico and the Eastern seaboard of the United States, from Texas to New Jersey, and in Puerto Rico. At each of these locations, the likelihood of Category 3, 4 or 5 hurricanes, with winds exceeding 111 mph, is estimated to be 21-34%.
High risk clusters for flooding that intersect with high risk of hurricanes were identified in Florida, Louisiana, North Carolina and South Carolina. In total, 164 retail locations and 8 critical infrastructure sites were identified as high-risk. At each of these locations, the likelihood of a severe riverine flooding event occurring is estimated to be 0.6%-1%.
The highest risk cluster is located in Southeastern Florida with 130 retail locations and 6 administrative sites (including office, distribution center, call centers and certain PBM locations), identified as facing climate-related, acute physical risks from hurricanes or flooding that, in the short term, could result in a substantive financial or strategic impact on the business.
Wildfire Susceptible Locations
In California, two high risk clusters comprising a total of 186 retail locations were identified as facing climate-related, acute physical risks from wildfires that, in the short term, could result in a substantive financial or strategic impact on the business. In California, high risk wildfire areas are defined as those with the greatest likelihood of very severe and severe uncontrolled fire in an area of combustible vegetation, most common in rural areas and during periods of high temperatures, high wind, low humidity and low precipitation. Other susceptible geographies include locations in Arizona, Colorado, Nevada, and Oregon.
Opportunities by Geography
In California, there was an observed shift in consumer preferences, namely increased demand for disaster preparedness items during wildfire season. The referenced items include first aid kits, flashlights, bottled water, and particulate matter-blocking face masks to combat the effects of personal injury, extreme heat and brown-outs, infrastructure disruption, and dangerous air quality.
Geographies prone to hurricanes and flooding have also demonstrated increased demands for disaster preparedness items. We expect that the geographies noted above as being susceptible to hurricanes, flooding, and wildfires may experience increase demand for disaster preparedness items in the future.
Opportunities relating to our Enterprise Modernization strategy are focused on savings at our headquarters in Woonsocket, RI and corporate offices throughout the United States.