Climate change as real business risk

Climate change as real business risk

While the national debates surrounding fossil-fuel divestment and the Keystone XL pipeline earn the most attention in columns and talk shows these day, the deeper underlying desire among many shareholders is for the United States to become serious about the real risks of climate change. And to do something about it — or, at least, to form a consensus on the policy and economic strategies needed to primarily reduce atmospheric carbon.

The regulatory framework for greenhouse gases has not yet emerged from Washington, and putting a pricetag on carbon as a way to limit and tax, together with increased investments in renewable energy, are two of many approaches needed to facilitate the transition to a post-carbon energy reality.

Often overlooked in the discussion, however, are the steps that companies and communities can and should take well ahead of proposed regulations.

There are sectors of the economy that face a higher degree of risk than others as climate change brings us extreme weather events:

  • agriculture and the food products industry must address shortages caused by severe drought, flooding, and hurricane damage;
  • utilities experiencing greater power demand during extreme weather while paying price premiums for energy; and
  • the insurance industry faces a higher number and magnitude of claims from greater losses.

This is in addition to the general overall economic threats that low-lying human settlements face if they are in the potential path of floods, hurricanes, and tornadoes, or that communities in dry forested areas face due to fire danger.

Next page:  New attitude toward climate change risk

Shareholders and managers understand that managing risk is an important aspect of running a company. Elected officials who may disallow the rebuilding of homes on hurricane-prone coastal lands are, in essence, determining that the risks outweigh the benefits. In the corporate world, there is a need to understand that the unprecedented risks we’re facing can serve as a tremendous impetus for strategic planning that averts or mitigates climate change risk.

The SEC agrees. In 2010, it issued its Commission Guidance Regarding Disclosure Related to Climate Change, which states that increases in storm intensity, sea-level rise, thawing permafrost, temperature extremes, changes in the availability or quality of water or other natural resources, floods, and decreased agricultural production capacity can materially affect companies in the areas of personnel, physical assets, and the supply and distribution chains. It also affects the prices of raw materials, particularly ores, agriculture, food, energy, and clothing. Travel and tourism is highly vulnerable to climate impacts as well.

Last year, Calvert Investments, Ceres, and Oxfam America issued a guide to disclosing and managing Physical Risks from Climate Change, and offers specific suggestions to companies specifically in the areas of food, apparel, electric power, insurance, mining, oil and gas, and tourism. Questions are posed in various categories: value chain; climate resistant and resilient systems and policies; vulnerable regions; disaster strategies; water risks; impacts on prices, capital, markets, and opportunities; and impacts on stakeholders and communities.

Next page:  Another useful report

While the Calvert guide includes a few broad risk-management strategies and a disclosure checklist for physical risk, the Partnership for Resilience and Environmental Preparedness (PREP) released its Value Chain Climate Resilience guide to managing climate impacts in companies and communities. The step-by-step climate resilience framework enables companies to analyze and strategize around risks and opportunities, including how to assess current risks and policy implications, engage internal stakeholders, identifying resiliency strategies and new business possibilities, prioritizing strategies, and implementing and evaluating actions taken.

Examples of climate change risks facing a company include:

  • ecosystem damage
  • asset and company infrastructure damage
  • disclosure obligations and regulatory, shareholder, and community pressures
  • impact of altered company operations on jobs and therefore local economies
  • raw material availability and commodity price volatility and spiking
  • costs and constraints on industries relying on water for productionfor production
  • distribution network disruption
  • lender and investors integrate climate change factors in financing businesses
  • worker health and safety hazards

Examples of opportunities emerging due to climate change include:

  • new sources of supply
  • new sources of adaptation financing and risk transfer mechanisms (e.g., carbon credits)
  • government policy and financial support for adjusting to a new climate reality
  • improved reputation and the possibility of competitive advantage
  • consumer demand for new, resilient products and services
  • properly planned facilities can minimize climate-cased operational disruptions
  • improved ecosystem performance and local community socioeconomic conditions

The report includes case studies on how Entergy, Green Mountain Coffee, Levi Strauss, Starbucks, and Swiss Re are implementing climate change risk-management strategies. As these and other companies ask themselves the tough questions — such as “How could the raw materials we rely upon be affected by an increase in the intensity and frequency of extreme climatic conditions?” — they can develop an internal strategy that addresses operational protocols, stakeholders involvement, technical needs, responsibilities, and asset protection processes that touch all aspects of a company: product supply, operations, transport and logistics, government affairs, investor relations, corporate responsibility and regional departments.

Photo by Edler von Rabenstein via Shutterstock.