How Businesses Can Plan for the Unpredictability of Climate Change
With managers across industries under pressure to developsophisticated views about how climate change will impact their
companies, it might seem natural to look to the insurance industry
for guidance on how to act and communicate about risks and
opportunities.
After all, with climate change threatening to increase the severity
of humanitarian crises, economic disruptions, and weather-related
disasters – which, in the last half century, have
target=”_blank”>cost more than a trillion dollars and killed more
than 800,000 people (PDF) – the insurance sector is being
called on (PDF) to play a special role in helping society to
adapt to climate change.
Unfortunately, even the insurance industry lacks the coveted
crystal ball that would preview exactly how climate change will
impact us. That’s partly because prediction works by projecting
future events based on past experiences, such as showing what the
average distribution of the next thousand hurricanes in the Gulf of
Mexico might look like. Climate change variables can be factored
in, but what to include and how much to adjust them
target=”_blank”>remains largely guesswork.
Even if we had the parameters to guarantee more statistical
accuracy, we would still be at the mercy of what matters most:
low-probability, high-consequence events that happen once in a
generation, such as this summer’s heat wave in Russia and floods in
Pakistan. Such outliers are hard to pinpoint in advance, yet these
are precisely what the
target=”_blank”>Intergovernmental Panel on Climate Change
(IPCC) says business should be most worried about.
As a result, while climate science provides evidence of general
trends, we are still a long way from being able to predict specific
climate events. In lieu of precise predictions, a key to
effectively managing the physical effects of climate change is
preparedness, which can be achieved through developing literacy,
identifying plausible impacts, evaluating priorities, and building
resilience.
Practical Frameworks for Climate Change Preparation
• U.K.-based
target=”_blank”>Acclimatise’s three themes for senior
executives (PDF): The group’s 10 questions cover
risks, opportunities, responses.
•
target=”_blank”>Alberta Sustainable Resource Development’s
four-part framework (PDF): Scope and prepare,
assess vulnerability, assess risk, and identify options – and
integrate these into strategic management.
•
target=”_blank”>Economics of Climate Adaptation Working
Group’s five-part framework (PDF): Identify risk,
calculate expected loss, build response portfolio, implement, and
measure.
•
target=”_blank”>Pew Center on Global Climate Change’s three
questions (PDF): Is climate important to business
risk? Is there an immediate threat, or are long-term assets,
investments, or decisions being locked into place? Is a high value
at stake if a wrong decision is made?
•
target=”_blank”>Risk Management Solutions’ four-module
natural hazards model (PDF): Define hazard
phenomena, assess hazard level, quantify physical impact, and
measure monetary loss.
Developing Literacy
For business, developing literacy means understanding the mechanics
by which climate change is likely to affect your company, and how
to manage uncertainty.
In that sense, while climate change is expected to produce negative
effects overall, there will also be important new societal needs
related to climate change’s direct effects on water, food, health,
ecosystems, and coastal areas that businesses can focus on.
These impacts can be thought of as both risks (your workforce
becoming increasingly susceptible to disease) and opportunities
(the chance to develop and distribute health-improving
solutions).
Future climate impacts are a function of three
things:
1. Impacts from today’s climate, which may pose real risks, such as
windstorms or floods, even if they haven’t materialized
2. The potential effects of climate change, which could multiply
those threats
3. Development paths that put more people and assets in harm’s
way
To develop expectations about total future impacts, business can
use
target=”_blank”>various techniques for characterizing the
future, such as scenarios, storylines, analogues, qualitative
projections, sensitivity analysis, and artificial experiments such
as thought exercises. These all offer different tools. For example,
analogues use past events to anticipate how communities will
respond in the future, and storylines create narratives about how
the company might logically evolve in response to climate-related
economic trends.
Identifying Impacts
Given the most plausible physical effects of climate change
mentioned above, which impact virtually all industries and regions,
the next step is to identify where and how they might affect the
company the most.
The answer depends on a range of geographic, market, and
sociopolitical factors. As a starting point, the IPCC suggests that
the most intense business impacts are likely to result from extreme
weather, especially in coastal and flood-plain regions, in areas
where subsistence is at the margin of viability, and near
boundaries between major ecological zones.
With respect to business operations, impacts are most likely when
there is dependence on longer-lived capital assets, (such as
energy), fixed resources (such as mining), extended supply chains
(such as retail and distribution), and climate-sensitive resources
(including agricultural and forest products, water demands,
tourism, and risk financing).
Finally, impacts are most likely in sociopolitical environments
where substantial key stakeholder groups are based in poor
communities, especially in areas of high urbanization. (For more
details, review the IPCC’s report on ”
target=”_blank”>Impacts, Adaptation, and
Vulnerability.”)
Evaluate Priorities
Once a set of potential impacts has been identified, they can be
used to evaluate the relative areas of concern. One way to
structure this assessment is to evaluate the following conditions
independently: the intensity of likely climate change hazards, your
company’s and its stakeholders’ vulnerability to those hazards, and
the values at stake, both financial and human.
You can combine these to form probabilistic values for each
potential impact, and then compare these impacts against each other
to provide a picture of the most important expected effects across
the organization.
Such a study is accessible to most companies. For example, a
combination of desktop research, interviews with experts, and a
facilitated discussion with management could provide a good
estimate of the conditions mentioned above. This, in turn, can form
an appropriate initial assessment for coverage in an annual report
or in your company’s reporting to the CDP in May. To make the
conclusions actionable, aim less for an abstract list of
calculations and more for judgments that yield a rank-order
priority set.
Build Resilience
A final step in preparing for climate change is to build
resilience, which involves two steps. The first is to make
“if-then” decisions. For instance, if energy prices quadruple, a
drought occurs near a water-intensive plant, or a key ingredient is
listed as endangered, what would your company do? This assessment
should include both traditional disaster planning as well as
defining contingencies for sudden changes in market needs or
necessary supplies.
By extension, this is the time to consider how your company should
react to plausible changes that could impact the whole enterprise,
such as breakthroughs in energy information technology or
aggressive climate policies in China’s next five-year plan.
Of course, this should also include a review schedule: what to
watch for, and when. In sum, managers should be ready for anything,
or at least what’s plausible.
The second step is taking proactive measures now, or if not now,
then timed with and integrated into new capital investments. These
measures include ensuring that new buildings and infrastructure
meet codes to withstand extreme events; improving land-use
planning, such as by limiting development in at-risk areas; and
preserving wetlands, forests, and other natural ecosystems that
provide cost-effective natural protection against storms and
erosion.
When investing in these measures, combine adaptation with
mitigation efforts wherever possible, such as by building green,
and be wary of paths that are increasingly energy and water
intensive because such resources will likely be under increasing
strain.
It’s also important to pay special attention to people in poor
communities and developing countries, as they are likely to be most
affected by climate change, and therefore have growing needs for
companies to fulfill.
Ryan Schuchard is manager of Research & Innovation at BSR.
Editor’s note: This article was authored by
consultancy focused on sustainability. It was previously published
in greenbiz.com and is reprinted here with the kind permission of
the author.
Source: www.greenbiz.com
