Adjusting and adapting to an inevitably warmer world, more far-sighted private companies are moving forward even in the absence of strong government leadership globally and nationally. Understanding, anticipating and managing their risks are becoming those companies’ new, and challenging, reality.
A warmer planet is now inevitable.
Climate models suggest greenhouse gas (GHG) emissions have virtually locked in a temperature increase of more than 3.7F (2 degrees C) above pre-Industrial levels. Even the most optimistic scenarios show emissions peaking around 2050, too late to avoid “dangerous interference” with the climate system above this 3.7F mark, according to the Intergovernmental Panel on Climate Change (IPCC). Some experts are now revising the danger threshold down to just 350 parts per million (ppm) of atmospheric carbon dioxide (CO2) (Target Atmospheric CO2: Where Should Humanity Aim), putting us squarely in the red zone since today’s CO2 levels are 393 ppm and increasing by about 2 ppm annually.
If it’s too late to halt climate change, then adjusting and adapting to this warmer world will be inevitable, even with efforts to prevent a more extreme climate in the future.
So who’s ready for this sweltering future? Government preparations have attracted most of the attention, but some corporations, with little fanfare, began assessing their climate risk a decade ago after linking their bottom lines to rising levels of GHG. With the planet’s climate changing faster than predicted in many cases, more companies are moving to act.
“What we have seen is a very fast-growing awareness of climate change risk, and adaptation is something that large corporations need to be managing,” says Richenda Connell, co-founder of UK-based Acclimatise, which specializes in climate risk management and serves clients such as the UK Ministry of Defense, and the City of London and the energy firm BP.
Adaptation, for most of the world, promises to be a challenging reality. The World Resources Institute (WRI) predicts no country will entirely escape the painful disruptions from a more volatile climate: higher prices for commodities, raw materials, and insurance, as well as delays in electricity, water, and transport services. The situation will be most problematic in the tropics, where climate models predict crop failures, desertification, water scarcity, expanding disease risk, and extreme weather.
In essence, climate change is repositioning the world’s weather between volatile extremes: dry areas may be punished by extended drought, while wet climes will endure intense rain and floods. Other effects — sea level rise, ecosystem shifts, and water scarcity — present unpredictable challenges worldwide. Taken together, the World Business Council for Sustainable Development expects these to influence “the location, design, operation and marketing of infrastructure, products and services” and also the health of workers and markets around the world.
“Understanding that risk,” says WRI’s Samantha Putt del Pino, “is something every business is going to have to do.”
Embracing Change, Sometimes
The international mining company Rio Tinto started studying its climate vulnerability in 2002. After identifying water competition, increased cyclone activity and deteriorating ice road access to its Canadian diamond mines as climate risks, the firm systematically integrated climate considerations into its operations. While immediate threats appear limited, Rio Tinto predicts these will increase over time, particularly in the southern hemisphere. The company now is updating its engineering standards at several facilities while conducting high-resolution climate modeling with the University of Oklahoma at its most vulnerable sites.
Several other companies are taking climate precautions. Honda, Vodafone, SwissRe, and global energy conglomerate BG Group report that climate change is an explicit part of certain investment decisions. Other firms are re-positioning themselves for profit. Agriculture, mining, manufacturing, and shipping interests say a climate-stressed world will reward smart investments in solutions to a warmer world. Siemens and Volkswagen say they are pursuing a competitive advantage by improving such strategic technologies including water filtration plants and fuel-efficient engines. The F&C’s Global Climate Opportunities Fund even invests in companies that sell technologies and strategies for adaptation and GHG emissions reductions.
Financial institutions are sharpening this focus. Flip through the annual reports of Fortune 500 companies, and an increasing number cite climate change issues as part of their corporate decision-making. The Carbon Disclosure Project (CDP), which surveys the world’s largest publicly traded companies on climate issues for institutional investors, now reaches more than 4,000 companies with $64 trillion in assets, and reportedly receives responses from 82 percent of the world’s 500 largest public companies (FTSE Global Equity Index Series: Global 500). The 2008 CDP survey for Asia found that “initial climate change risk assessments often uncover a more frequent and higher impact pattern of weather risks to facilities and dispersed operations than managements had previously appreciated” and served as “a catalyst for enhanced risk management, especially where managements had seen climate impacts in narrow operational terms.”
Profits a Stimulus … but an Emerging ‘Business as Usual’
Not surprisingly, the most active firms are those expecting climate change to pose risks to their profits: energy and gas companies with long-lived infrastructure, insurance firms exposed to damages from natural disasters, and retailers reliant on complex supply chains. All stand on the front lines of a substantially changing climate, and have to think far ahead.
Yet what’s striking is not that multinational companies are concerned about climate change; it’s that these concerns increasingly amount to business as usual. To be sure, some still challenge scientific evidence of climate change and various mitigation or adaptation regulatory proposals, but their ranks appear to be thinning. Corporate statements and annual reports — while serving an important public relations role and not always reflective of a company’s true intent — present climate change as a real, potent, and evolving threat or, in some cases an opportunity, with none of the controversy that infects the political discourse. The U.S. Government acknowledged as much when its Securities and Exchange Commission voted in 2010 to issue guidance for disclosure of climate risks to investors.
That’s been standard practice at chemical manufacturer BASF for years, says Jodi Visco, manager of BASF’s product stewardship group in North America. The chemical manufacturer says it has tried to stay ahead of its climate risk because it is good business to do so. BASF created a Climate Protection Officer position in 2008, and now makes climate risk a routine part of its environmental impact assessment process, aided by an expert climate panel. “We’re focused on shorter term risks of complying with [climate] laws and regulations in countries,” says Visco. “When looking at adaptation and the longer term, we look at aspects of climate change in expansion plans or investment of capital.”
Planning for the Unpredictable
Efforts to understand adaptation may seem unnecessary for companies with short planning horizons or limited exposure to extreme weather. Many are ambivalent — or ignorant — about potential impacts, and only the most proactive are taking meaningful steps.
These attitudes may explain the results of the recent World Economic Forum’s Global Risk Survey (see note below). Climate change was voted the top global risk in terms of likelihood and impact, ahead of fiscal crises and geopolitical conflict, by leading figures in government, business, academia, and NGOs. When business leaders’ responses alone were tallied, a slowing Chinese economy, consumer price volatility, and fiscal crises dominated the list, leaving climate change, as they say, for some future time.
Adaptation is a slippery issue because of the difficultly in capturing the timing and magnitude of climate impacts on a balance sheet. In 2008, PricewaterhouseCoopers stated that fund managers still had “no hard evidence about the timing or degree of climate change impacts on specific sectors, making the inclusion of climate change factors in investment strategies on a systematic basis problematic.”
extremes, and not
That reality, argues Gary Yohe, an economist at Wesleyan University, misses the point. As a coordinating author of the IPCC’s 2007 Fourth Assessment and advisor for a series of Congressional studies entitled America’s Climate Choices, Yohe argues businesses must pay attention to the probability of extremes, not just the averages
“[Climate change] needs to be part of their annual and short-term planning decisions,” says Yohe. “I think they should certainly take full suite of possible climate futures and whole suite of policy futures.”
This risk management approach — in place of calculating the cost of singular unpredictable events — is the only way to capture the disparate risks climate change poses for businesses. Averages are deceptive. A few degrees or several additional inches of rainfall hide the rising frequency and intensity of more extreme events that transform the calculation of risk. Companies should be looking at the outliers, not the averages, when considering severe impacts. “Now, a 50-year storm ends up looking like an every five-year storm in terms of frequency, intensity and damage profile when it reaches landfall,” says Yohe.
Corporations might do well, Yohe argues, to follow the lead of cities such as New York, Seattle, and Chicago that have embraced a risk management approach to develop their next generation of infrastructure investments and public policies.
Climate variation has always been a part of the human experience. Yet humanity has been granted a remarkable degree of stability since the retreat of the last glacial period more than 10,000 years ago. The difference today, states the America’s Climate Choices series, is that instead of climate variability, we face climate change moving in a very particular direction and driven by processes we ourselves have set in motion. As the country itself may decide, however, businesses could come to see climate adaptation “as an insurance policy against an uncertain future.”
Note: Global Risks 2011, Sixth Edition, draws on the insights of 580 expert respondents to the Forum’s Global Risks Survey across stakeholder groups and regions. The survey measured the perception of risk likelihood, risk impact and risk interconnections from 2010 to 2020 for 37 global risks.
Major Corporations’ Positions
on Climate Adaptation
on Climate Adaptation
“Developing robust adaptation strategies based on our work with Imperial College will enable Anglo American to guard our operations, and the value chains, environments, and communities linked to those operations, against the negative impacts of climate change. More than simply managing risk, this is an opportunity for us to be more competitive than our peers who often operate in the same region and face the same risks. It is also an opportunity for us to work towards our vision of becoming a partner of choice…”
“By managing climate risk and weather risk effectively, we will be better positioned than our competitors, which provides us with commercial opportunities. For example, in the event of a severe weather event, if our facilities and processes are better protected, we are likely to be able to resume any interruption in supplies more quickly than our competitors.”
“We anticipate that the ship-owners that can offer the most energy efficient or low carbon fleet will have a competitive advantage in the future.”
“Every new product generation has to be more resource-efficient and has to cause less emissions than its predecessor … not only the fuel consumption but a whole lifecycle-based calculation taking all resources into account.”
“Siemens sees opportunities in climate change, has taken appropriate actions in its business strategy and adheres to the guiding principle of sustainability. We identified market-specific forward-looking trends and drew the strategic consequences early on.”
Swiss Re supports the position that climate change is occurring, having first identified climate risk more than 20 years ago … Swiss Re estimates that climate change, along with population growth, could put at risk more than the 200 million people who are already impacted each year by earthquakes, droughts, floods, cyclones and other hazards. The crux of our activity in this space is to promote cooperation between the public and private sectors to develop actionable solutions that can help make communities and individuals more financially resilient in the wake of climate-related disasters.
Sources: Carbon Disclosure Project 2010 Global 500 Report; SwissRe corporate communication.
Michael Coren is a graduate of the Yale School of Forestry and Environmental Studies, and former managing editor of Cambodia’s Phnom Penh Post.