6 steps to managing your company's physical climate risks
Editor's note: This is the first post in a new regular series featuring extracts from The DōShorts Sustainable Business Collection, short books that offer practical and expert solutions to emerging sustainability challenges.
This article is extracted from the book "Adapting to Climate Change: 2.0 Enterprise Risk Management" by Dr. Mark Trexler and Laura Kosloff. (Dō Sustainability, March 2013)
Developing a climate change adaptation strategy does not mean having to "climate proof" a company's operations against conditions that might not appear for decades into the future. But it does suggest that near-term decisions consider future climate risk in order to minimize future stranded investments, and to hedge against potentially accelerating climate change. Expanding one's perspective to climate change should generate several benefits:
- The massive amount of "noise" associated with today's weather patterns complicates the process of figuring out what you are adapting to; clear conclusions can be hard to find. Taking a longer-term view as part of a climate change adaptation strategy can help in interpreting near-term trends as well.
- Adapting to the weather, done at the local level by operational staff, can result in a patchwork of responses to changing climatic conditions that confuses stakeholders and complicates corporatewide investment decisions. A coherent climate change adaptation response will be based on corporatewide risk management principles, helping avoid such confusion.
- Focusing only on "the weather" may leave game-changing risks and opportunities unidentified. What if a company's entire business model is at risk over the next 20 to 40 years due to "high confidence" climate forecasts? Shouldn't that information find its way to the C-suite before it finds its way to investors, allowing the company to consider and manage both climate and brand risks?
When decisionmakers suggest that they're doing as much as they can, and can't go further in addressing climate risks, they are implicitly answering either the "Is it worth it?" or "Can I do it?" questions in the negative. For companies with long-term assets, or with vulnerable operations and supply chains, understanding and managing climate change risks is prudent enterprise risk management. Many companies are likely failing this prudency test, simply because they're not asking the right risk management questions.
If a company does decide to expand its risk management horizons from today's weather to future climate change, the remaining question really is: How can a company develop an approach to reducing business uncertainty around future climate change that is both practical and cost-effective in the short term, and which continues to learn over time from better information that can further reduce uncertainty.
In "The Signal and the Noise" (Penguin, 2012), Nate Silver explores decision-making under uncertainty across topics from baseball to politics and climate change. Using Bayes' Theorem, Silver explores iterative learning processes that make maximum use of available information, while incorporating new information over time in order to reduce remaining uncertainty. The approach to uncertainty management Silver describes is also a good fit for many climate change adaptation planning needs, as described in the following six steps.
- Assess corporate vulnerability to climate change hazards, emphasizing the need to take a "broad brush" approach to quantifying business vulnerabilities, focusing on those aspects of operations, investments and supply chains where vulnerability is most evident. This step should identify the potential manifestations of weather and climate change that are most relevant to a company's business model. Is it extremes that disrupt corporate operations or distribution systems, extremes that impact important nodes in a corporate supply chain, or other impacts?
- Understand what, if anything, is already happening. Once important vulnerabilities are identified, compare recent and more historic trends in those variables to see whether relevant conditions are already changing. For example, comparing relevant weather extremes for the past 20 years to the extremes over the past 50 to 100 years can generate considerable insight into the ways in which the weather is changing, and the pace of such change.
- Assess corporate exposure to climate change hazards forecasted to occur over a business-relevant timeframe, casting a wide net over corporate operations, investment decisions and supply chains. If anything more than 30 years out is categorically beyond the decision-making relevance of anything about which a company is concerned, then climate impacts unlikely to occur sooner than 30 years in the future can be excluded from the assessment. For example, sea level rise is one potential climate hazard, but we can be pretty confident that sea levels will not rise three feet in the next 30 years.
- Revisit corporate vulnerability to climate change hazards based on the earlier steps, again emphasizing the need to take a "broad brush" approach to quantifying business vulnerabilities, focusing on those aspects of operations, investments and supply chains where exposure was judged to be real.
Structure business risk hypotheses around climate hazards for which vulnerability is judged to be potentially material. A company may conclude its vulnerability to changes in extreme summer temperatures could be business material given the nature of its work and workforce. Based on its current understanding of the extreme temperature hazard, and its exposure and associated vulnerability to that hazard, company planners might settle on one of several hypotheses for adaptation strategy purposes:
- Hypothesis 1. Changes in extreme temperatures are highly unlikely to materially affect our operations in a timeframe relevant to our corporate planning, and therefore the hazard does not merit proactive adaptation measures.
- Hypothesis 2. We are already seeing changes in extreme temperatures, and forecasted extremes could have a material impact in a timeframe relevant to our corporate planning. We should track the topic and develop contingency plans for dealing with that vulnerability.
- Hypothesis 3. We are already vulnerable to observed temperature extremes, and we forecast the level of vulnerability to increase significantly within 10 years. We need to move aggressively to develop measures by which to mitigate either our exposure or our vulnerability to these extremes to keep risk within acceptable levels.
- Update hypotheses as well as exposure and vulnerability estimates. The beauty of the Bayesian approach to reducing uncertainty over time is that a company doesn't need to get too hung up about knowing or predicting the future at the beginning of the process. Rather, the company can focus initial effort where the organization has the most confidence in its analysis, namely assessing exposure and vulnerability to alternative hazard outcomes. The associated hazard hypotheses can start from almost any point, whether suggesting almost no risk, to suggesting very material risk. If the chosen hypothesis is significantly off base it will likely become clear relatively quickly as the hypothesis is tested against new information. The hypothesis, and associated adaptation conclusions, can then be appropriately modified.
Step 6 above is critical to this process; without the feedback and learning loop, risk reductions cannot be assured. Companies need to regularly revisit whether they observe material impacts, or whether best available information suggests changes to previous assessment of the likelihood of such material impacts. A Bayesian approach to learning from new information allows initial hypotheses regarding the business materiality of climate impacts to be regularly updated based on improving knowledge and science, and risk management strategies to be adjusted accordingly.
Iceberg photo by Jan Martin Will on Shutterstock