Our world these days seems to be a succession of forks in the road, points at which decisions need to be made about which pathway we collectively must take. In nearly every case, there's an unsustainable "business as usual" scenario (often shortened, unappealingly, to BAU) along with one or more alternatives. Each presents any number of quandaries about whether, how, and how aggressively to address the challenges at hand, whether economic revival, health care or electoral reform, social equity -- and, of course, the array of environmental and resource challenges that confront us. (Never mind that all of these issues are connected. Much as it would be ideal to address them holistically, that doesn't seem to be in the cards.)
And so it's not surprising, as 2009 sputters to an end -- as we anticipate an intensifying global debate on climate, address our growing global need for energy, consider our options for ensuring an adequate water supply, and plot the surest footing possible for commerce and investment -- that we would see the unleashing of a mild torrent of studies and findings in recent weeks. Each tackles intriguing and important questions, summarizing the opinions and conclusions of scientists, corporate executives, business leaders, and others. And each offers some roadmap of where to go from here.
I've been perusing a subset of the recent research spanning a range of topics. Herewith is a summary of four reports that offer valuable food for thought.
To begin, there's "Managing the Unavoidable" (PDF - registration required), by Henderson Global Investors, Insight Investment, RAILPEN Investments, and the Universities Superannuation Scheme. The group aimed to better understand the impact of climate change on companies and their investors in four sectors: electric utilities, oil and gas, real estate, and water utilities. The focus was on climate change adaptation, not mitigation -- that is, how companies in these sectors will shift their products, processes, and policies to succeed in a world grown warmer, but not necessarily what they'll do to help prevent warming in the first place.
The conclusion: Adaptation is beginning to receive more management attention but, with the exception of the water sector, most companies are focused more on mitigation. That is, "Companies are more concerned about risks than opportunities," such as the potential to profit from higher rates resulting from disruptions to the electricity supply. That may seem a cynical view, but from a business perspective, it's a little like automobile manufacturers seizing the opportunity to build ambulances to respond to an increase in auto accidents: So long as the need exists, why leave money on the table?
Of course, this has implications for investors. "We believe that investors need to examine how the risks and opportunities associated with climate change adaptation affect company-specific business models, value drivers, strategy, governance, cashflows and assets," say the authors. Moreover, investors "should ensure that companies have appropriate governance and management systems in place," such as robust risk identification and assessment processes, clear strategies for managing and responding to climate change, and clear reporting on risk assessment and management processes and on the company's views on the materiality of climate change-related risks for their business.
Takeaway: Climate change adaptation strategy is becoming a boardroom issue. It may no longer be enough to measure and manage one's carbon footprint. Companies that don't have a strategy to adapt to climate change may find themselves reeling from "surprises" they might have otherwise anticipated.
A similar, sector-specific concern was expressed by the insurance giant Allianz and the nonprofit environmental group WWF in a report on "Major Tipping Points in the Earth's Climate System and Consequences for the Insurance Sector" (PDF). It ponders the small changes that, at some point, could cause big changes in weather, sea levels, and other things. It chronicles several potential consequences -- sea-level rise along North American coasts, Indian Summer monsoons in Asia, Amazon die-back and drought, desertification of the southwestern U.S. -- and the "insurance aspects" for each.
Their conclusion: We're hopelessly in the dark about what these things mean financially.
Despite their potential to affect very significant numbers of people and assets, these tipping points are virtually absent from policy and decision contexts concerning what changes in temperature or other variables constitute "dangerous climate change." Work to provide early warning of such tipping elements could help us adapt to or mitigate them. But getting companies to take action on the basis of such early warnings is, arguably, the greater challenge.
Takeaway: The impacts of climate change on companies may not come through horrific, sudden hurricanes, fires, or other calamities, but through seemingly small changes that rapidly turn into big ones. Once again, the need to anticipate and plan for various climate scenarios is rising in importance in some industries.