What the IPCC's new report means to business

A new report released today by the world’s leading climate change scientists states it is "extremely likely" that humans have been the main cause of global warming since the 1950s.

The first portion of the multi-volume report, released by the U.N.’s Intergovernmental Panel on Climate Change (IPCC), confirmed that climate change is “unequivocal” and that continued carbon emissions will lead to increased temperatures and changes throughout the climate system.

This is bad news for businesses, which stand to suffer major losses from extreme weather events. The report highlights the need for companies to understand the financial risks involved and accelerate their efforts to mitigate global warming, said Mindy Lubber, president of Ceres, a nonprofit that mobilizes businesses and investors on climate change, during a conference call Friday with leaders from the apparel, manufacturing and investor industries.

"This report provides stunning clarity on the need to act and the need to act now,"  Lubber said.

Many companies and investors are already taking action, moving away from the old debate and the naysayers of climate change to a new paradigm, aimed at finding solutions, she said.

Nick Robins, head of HSBC Bank’s Climate Change Center of Excellence, said the IPCC report will help push companies to take action and renew their impetus to make changes. The report comes at an opportune time, he said, ahead of the U.N.’s Conference on Climate Change in 2015.

“Now is a very good time to revitalize the commitment companies are making to integrate low carbon strategies,” said Robins.

Of particular concern to many companies is the carbon budget, which is defined as the amount of emissions humans can generate while still keeping the rise in global temperatures below 2 degrees Celsius, a target agreed on by the international community.

In 2011, the world already used up just more than half of the allocated amount (531 trillion tons). If carbon emissions continue at the current pace, the budget will be used up by 2040, found the report.

The carbon budget carries huge implications for the business community. The fossil fuel industry has nearly 3000 gigatons of carbon dioxide stored in known reserves of coal, gas and oil, far more than the carbon budget would ever allow for. This means that many of the fossil fuels may never come out the ground. These companies may therefore be worth a lot less than what they are stating because their assets may never be burned. Investors in the United States and around the world have already called on the 40 major fossil fuel companies to assess the value of their businesses if they are unable to use their assets.

“Investors have a responsibility to all of us to understand the real value of a company,’ said Lubber.

For VF Corporation, an apparel and footwear manufacturer, climate change poses a very real threat to business. The company is one of the single largest purchasers of cotton, a commodity that is vulnerable to extreme weather conditions, pests and water scarcity, which in turn effects the price of cotton.

“The impacts increase as the climate change impact grows,” said Laetitia Webster, VF’s director of global corporate sustainability.

Much of the company’s cotton comes from countries such as China, India and Brazil, areas the report highlights as particularly high-risk for the consequences of climate change. VF is already feeling the effects, Webster said. For example, farmers in Texas planted 3.7 million hectares of cotton this spring, but due to the severe drought, they were only able to harvest less than half that amount. VF is working to mitigate the effects of climate change, and has worked with various projects, including the Better Cotton Initiative, to implement change at the farming level, including greener harvesting practices.

The company’s brands, which include outdoor clothing labels North Face, Timberland, Reef and Nautica, and its customers “are really feeling an impact,” Webster said. For instance, skiing season is now roughly two weeks less due to global warming, which translates to fewer skiers and therefore fewer people buying winter clothing. As the report states, seaside communities are being affected by storms and the acidification of the oceans, something that consumers are seeing first-hand and reporting back to the company, Webster said.

“These impacts are real, our brands and consumers are seeing it and they expect us to act in a responsible way,” she said.

The report’s key findings are also of real concern to insurers and reinsurers, and should inform how they plan and shape their businesses going forward, said Lara Mowery, global head of property specialty at Guy Carpenter, a reinsurance company.

But the very nature of these companies – to assess risk – has become more challenging, and will continue to be so, due to the volatile effects of climate change.

“Understanding climate change in future is important, and provides vital info for ongoing industry exercise,” said Mowery.

Global losses to the insurance industry due to environmental catastrophes are increasing, she said. Based on a rolling ten-year time frame, the annual loss in 1980 was around $10 million. But in the last few years that loss has jumped to $50 million as a result of increased global catastrophes like last year’s Hurricane Sandy. According to the report, coastal flooding from hurricanes and tropical storms poses one of the biggest hazards of climate change, and will only become worse as sea levels continue to rise.

Insurers and reinsurers need to keep their research updated and adjust their business plans accordingly.

“Over time this has involved and will continue to involve capital at risk,” Mowery said. “We can’t just keep putting more money in the path of what’s happening.”

But the insurance industry is starting to look ahead and innovate their products. For example, the Metropolitan Transportation Authority (MTA) developed a catastrophe bond, the first of its kind to specifically cover storm surge. Traditional insurance constricted the organization after Sandy’s $68 billion in US damages, said Mowery, but the new bond offers a long term alternative reinsurance option that diversifies its insurance strategy, and so reduces overall financial risk.

A critical step for insurance and reinsurance companies is to invest in projects that temper the effects of climate change, such as building codes to improve resilience during a flood, which helps protect insurers in the long run.

Business experts agree that it isn’t too late for companies to take action.

“We know from our work with thousands of companies around the world that those that do act early are benefiting in lower energy costs and new business opportunities from a move to a sustainable, low carbon economy,” said Tom Delay, CEO of Carbon Trust, in a statement.

Image of ice in Antarctic by fivepointsix via Shutterstock