4 climate risk scenarios your business shouldn't miss
Looming at the edge of the collective consciousness of most businesses is "'the big unarticulated issue.' Everybody feels it, it is there, always present, the imminent threat or the un-seized opportunity," says Kees van der Heijden in his classic study of business scenario planning, The Art of Strategic Conversation. "It is so vast, so different from business-as-usual, that existing management thinking just can't cope."
The implications of climate change are so large and so contrary to the course of society since the Industrial Revolution that climate change is probably the biggest "unarticulated issue" of them all.
It's particularly challenging for the private sector. Corporate adaptation won't be limited to the physical impacts of climate change; it also will have to address changing business and policy contexts. For companies focused on getting through the next two quarters, however, seeing the business materiality in climate change, much less incorporating it into long-term planning, is difficult.
When companies do want to look farther ahead, the problem becomes, "Adapt to what?" Even proactive companies are so unsure of what the future holds that they can remain stuck in neutral. That doesn't have to be the case; corporate adaptation efforts successfully can advance even in the face of uncertainty.
Unfortunately, business uncertainties keep many companies from seriously thinking about climate change at all. That's where scenario planning comes in. As van der Heijden notes, "If properly developed and institutionalized, a set of scenarios can be the institutional 'memories of the future' to help organizations perceive their environment … using multiple storylines to encapsulate learning is powerful."
Pioneered by Shell some 40 years ago, scenario analysis remains widely misunderstood and underused in most business sectors. Scenarios help us escape from preconceived notions of what we "want to be" or what we think "will be," instead of considering what "could be."
Even then, companies that do develop scenarios commonly combine them into a single "most likely" scenario. It's easy to see why that is attractive, because it tells the company what future to prepare for. But it runs contrary to the point of developing scenarios in the first place, which is to open the decision-making process to consideration of alternative futures.
Compounding the problem is that, in generating the most likely scenario, a company is almost certain to settle on a forecast that implicitly supports the path the company is already on. Corporate planners are understandably reluctant to come up with (much less publicize) a most likely scenario that suggests their employer is on the wrong path.
This is a huge problem for climate change adaptation, because what could be is so dramatically different from what most companies explicitly or implicitly assume will be.
In the face of this cognitive dissonance, can climate risk scenarios help companies frame the business risks and opportunities of future climate change and climate policy? In a recent strategic planning exercise with a Fortune 100 company, we developed four climate risk scenarios that helped participants.
Climate risk scenario 1: Business as usual -- stay the course
Climate change progresses as climate models currently anticipate. Average global temperatures rise by some 34 degrees Fahrenheit by 2050, and average global sea levels by .33 meters. The difficulties of achieving a coordinated international response to climate change prevail; the limited policy measures that are undertaken have little impact on climate trends.
Climate risk scenario 2: Accelerated change -- lagging policy
Climate change accelerates in line with recently observed trends. Average global temperatures rise by 2.5 degrees C by 2050, and sea levels are .66 meters higher. Climate change tipping points, including an ice-free Arctic, have accelerated the rate of change. A coordinated policy response still fails to materialize, even as adaptation needs grow rapidly.
Climate risk scenario 3: 2020 climate policy response
Climate change accelerates as per Scenario 2, but a steadily worsening series of climatic events led by Hurricane Sandy in 2012 causes the politics of climate change to shift. A material climate policy response takes hold in in 2020. Draconian emissions reduction measures are imposed to limit the possibility of runaway climate change by 2100. A carbon price of $75 per ton of carbon dioxide equivalent emissions is imposed in the electric sector, and $150 per ton in the transportation sector.
Climate risk scenario 4: 2040 climate policy response
Climate change progresses, as with the first scenario, but a global policy response is triggered in 2040 when it becomes obvious that climate change will have catastrophic impacts during the second half of the century. By 2040, greenhouse gas (GHG) emissions have grown substantially from current levels, and significantly more climate change is in the pipeline. The policy response is therefore more draconian than in Scenario 3, with a carbon price of $125 per ton being imposed in the electric sector, and $250 per ton in the transportation sector. Geoengineering options are also fast-tracked.
These are just a few of the almost infinite range of potential climate change scenarios, but they seem to effectively bookend corporate risk.
We can't truly know the future when it comes to the rate and degree of climate change, or to the nature of resulting domestic and international policy. But as long as GHG emissions remain an economic externality, and climate policy does not reflect the true risks of climate change, changing business contexts are inevitable. Integrating a range of climate policy scenarios into business strategy is one way for companies to show stakeholders they're taking the issue seriously.
Chart image by Dusit via Shutterstock.com.