Risks that connect: lessons from El Niño

The chain of transmission, and not the phenomenon itself, is what we should be managing

Some risks arrive without warning. Others, on the other hand, send us signals with enough advance notice; we know they are there, we can observe their evolution and, even so, we do not always manage to incorporate them into our decisions in time. The El Niño phenomenon undoubtedly belongs to this second category.

Last September 3, the World Meteorological Organization (WMO) confirmed that the El Niño episode is firmly established in the tropical Pacific and will continue to intensify until it reaches a very strong intensity, with its peak expected between November and December. The WMO also estimated at close to 100 % the probability that the phenomenon will persist until February 2027. This is, moreover, a particularly forceful update: according to the organization itself, it is the first time one of its El Niño updates has used such a high level of certainty.

The data help gauge what is happening. The Niño 3.4 index averaged 1.5 °C above normal between May and July; in July it reached 2 °C and, by mid-August, recorded weekly values of between 2.2 °C and 2.6 °C above the average. We are therefore not facing a distant or uncertain signal. The information is available, the phenomenon is observable and the projections offer a time horizon that should allow us to anticipate.

The question, then, should not be only how intense El Niño will be, but how prepared we are to manage its possible effects. Because knowing the threat in advance only has real value if that information translates into timely decisions, preventive measures and response capacity.

Risk does not stay where it is born

For those of us who work in risk management, this distinction is fundamental. El Niño, by itself, is a climate phenomenon. However, its effects do not stay within the climate sphere: they move easily into other risk categories and can trigger a true chain of impacts.

A sustained alteration in rainfall and temperature patterns can generate droughts, floods or episodes of extreme heat. These, in turn, can affect agricultural production, water availability, food prices, electricity generation, transport and supply chains.

That is where the real conversation about risk begins. A disruption in the logistics chain can become an operational problem; the deterioration of operations can affect results; a lower repayment capacity can translate into higher credit risk; the rise in certain prices can generate inflationary pressure; and the impact on entire sectors can end up having implications for employment, consumption and economic activity.

In other words, risk does not stay in the category where it originates. It spreads, connects with other risks and can amplify its effects. Precisely for that reason, “emerging risks” are a particular challenge for organizations: the relationships between risks can become as important as each risk considered in isolation.

The Dominican case: the risk map is inverted

Here it is worth bringing the analysis down to our territory, because the effect of El Niño on the Dominican Republic is not necessarily the same as in other regions of the world, nor does it match the scenario we might intuitively expect.

The Dominican Institute of Meteorology (INDOMET) has pointed out that, historically, El Niño is associated in the Dominican Republic with reduced rainfall, a higher risk of meteorological drought and higher temperatures. Since May, it had also projected a transition toward conditions of rainfall deficit during the second half of 2026, with the resulting pressure on water reserves. The WMO update points in the same direction: for the September-November quarter, it estimates a 70 % to 80 % probability that the Caribbean will record above-normal temperatures, as well as a high probability of below-normal rainfall.

At the same time (and this is, from a risk management perspective, one of the most interesting aspects), El Niño tends to inhibit the formation of cyclones in the Atlantic due to increased wind shear. This introduces a relevant paradox: the climate scenario that can reduce a threat we know and for which we have protocols and experience can also intensify other threats that are less visible but have equally relevant effects.

In other words, the most likely scenario for the country is not necessarily the scenario we are best prepared for. Our continuity plans, emergency protocols and a good part of our institutional risk culture are built around the hurricane: an acute and visible event, with a start and an end, capable of triggering declarations, committees, protocols and coverage.

Prolonged drought is, by contrast, another kind of challenge. It is chronic, silent and hard to associate with a single moment of impact. Its effects accumulate slowly and can begin to show up in the costs, revenues and financial results of entire sectors before anyone declares an emergency. It does not necessarily make headlines; it can generate losses, financial pressure and provisions.

None of this means we should neglect the hurricane season. A single storm, if it hits in the wrong place at the wrong time, can upend any expectation based on a seasonal forecast. It means, rather, that over the coming months we should devote at least as much analytical attention to water and temperature risk as we devote to wind risk.

Because managing risk is not only about preparing for what we know may happen. It also means asking ourselves which risks we are leaving out of our attention precisely because they show up in a way we are not used to managing.

What does this mean for the financial sector?

From the perspective of a financial institution, asking “what impact will El Niño have on our bank?” will probably not take us very far. The useful question is a different one: through which channels could El Niño affect our risk profile?

From there, it is indeed possible to build scenarios. Which sectors in our portfolio concentrate greater exposure to water deficit, extreme heat or logistics disruptions? What could happen to the repayment capacity of certain segments if food and energy prices rise at the same time? Are there credit concentrations that, without having been explicitly identified that way, are correlated with climate factors? Which critical suppliers, technology services or energy and telecommunications infrastructure could be affected?

And there is an additional question that tends to be decisive: what would happen if several of these factors materialized at the same time? Do our continuity plans contemplate a scenario in which multiple organizations, suppliers and critical services are affected simultaneously? That interconnection is precisely what can turn an initially localized event into a problem of systemic reach.

Perhaps the underlying question is this: are we managing these risks as independent events or are we understanding the connections that can make one trigger or amplify the others? Emerging risk or systemic risk?

It is worth pausing on the terms, because they are not interchangeable.

El Niño is not a new risk. It is a known, recurring and reasonably well-modeled phenomenon. What may be emerging is the way its consequences interact with our current context: a known risk takes on the characteristics of an emerging risk when its magnitude, speed, frequency, degree of interconnection or capacity to produce impacts that our traditional models were not designed to capture changes.

And it becomes systemic not because of the phenomenon itself, but because of the chain: when the event stops affecting individual organizations in isolation and begins to affect counterparties, sectors and suppliers that our models treat as independent at the same time. The chain of transmission is the risk.

Hence a lesson that seems central to me: emerging risks do not always appear out of nowhere. Sometimes they have been in front of us for months, and what is missing is not information but the capacity to connect the signals.

From being informed to being prepared

There is an important difference between knowing and being ready. We know El Niño is happening. We know it will intensify. We know its impacts will not be the same in all regions, something the WMO itself takes care to clarify: the intensity of the episode does not by itself determine the severity of its consequences in a given country, which also depend on the time of year and on other factors, such as the state of the Indian and Atlantic oceans.

But that uncertainty is not an excuse to wait. We can carry out scenario analysis and stress tests with explicit climate assumptions. We can identify vulnerable sectors, customers and processes. We can review concentrations through a lens we had not applied until now. We can assess critical suppliers, strengthen continuity plans and establish early warning indicators, which in this case are unusually accessible: reservoir levels, cumulative rainfall, international food and energy prices, INDOMET bulletins. We can, in short, turn climate information into information for decision-making.

An invitation

I propose an exercise that goes beyond this particular phenomenon. Let us take a climate event and follow its chain of impacts all the way through: which sectors are affected, then which customers, then which processes, which suppliers, which assets, which financial indicators, which risks. And finally, the question that matters: where are our points of vulnerability and what can we do before the scenario materializes?

For those of us who work in risk management, El Niño is much more than a climate warning. It is an invitation to think differently. Because managing risk is not only about preparing for what we know may happen; it is also about understanding how one event can trigger others that, at first glance, seemed to have no relation to each other.

And perhaps that is one of the most important competencies of our profession in the coming years: to stop looking at risks as isolated points on a map and begin managing them as networks of interdependence.

Author: Gabriela Sánchez Castro

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Economist

Member of the board of the Dominican Republic Risk Management Club (CGRRD)

Co-Coordinator of the CGRRD’s Business Continuity and Organizational Resilience Committee

She has experience in risk management, governance and organizational resilience, and actively promotes the integration of the reputational approach into continuity and crisis plans.