Helping Business Adapt to Climate Change

As climate change sets in, its impacts — increasing severity of storms and weather disasters, receding snow and rivers, advancing deserts, and more frequent landslides and floods — will test companies’ ability to effectively deliver high-quality products and services.

In response, BSR is launching a series of briefs to illustrate how these changes will affect each industry and what current adaptation practices look like, beginning with an examination of the food, beverage, and agriculture sector (PDF).

Some effects of climate change will be familiar, such as crop failures and ensuing price shocks, but over the next several years, they will happen with more frequency and with even higher insurance costs. Beyond direct business impacts, companies will also need to understand how climate change will affect their most vulnerable stakeholders — the poor, citizens of developing countries, and women — who will face increasing risks due to drought, disease vectors, and the perils of migration.

The good news is that many resources on business adaptation to climate change are already available (see end of article). McKinsey & Company developed a cost curve for adaptation (PDF), for example, which highlights different adaptation options and shows that investment paybacks can be short. Also, companies do not need to choose between adapting to climate change and helping to mitigate it; the distinction between these two is rarely clear and we should do both together.

There are also tools that translate state-of-the-art climate monitoring, prediction, and imagery into practical information to help companies improve their relevant governance and decision-making processes. These tools include: the Climate Administration Knowledge Exchange (CAKE), Google Earth Engine, the International Research Institute for Climate and Society, the National Oceanic and Atmospheric Administration’s Climate Prediction Center, and weADAPT. Companies can also take advantage of new market opportunities by providing solutions to enable effective adaptation.

There are several obstacles to climate adaptation, even for those most committed to proactive and responsible responses. First, the language of adaptation does not resonate well beyond specialists, so communicating on the topic is difficult. As Carmel McQuaid, Climate Change Manager at Marks & Spencer, recently told us, it’s usually more effective to engage stakeholders by communicating on the topics that matter most to them. For example, retailers would be most concerned with their ability to continue to sell high-quality products, such as coffee. For companies that thrive on innovation, positioning adaptation as part of the portfolio of trends affecting the industry is usually more effective than treating it as a standalone topic.

Another obstacle is the complexity and uncertainty of the climate. This goes for today’s weather, let alone the future of the climate more broadly, as evidenced by the fact that we are not well-equipped to handle disasters such as the recent floods in Pakistan and Australia. The fact is that we do not know how to properly prepare for disasters even when they are expected. This is partially due to the cognitive difficulty of coping with low-probability, high-impact consequences, and it is also a result of markets and organizations that don’t encourage or reward proactive preparation.

Third, our first reactions may not serve us well. Companies are at risk of taking seemingly sensible actions that may lead to adverse effects elsewhere or on others. Such “maladaptation” (PDF) can take many forms, such as combating heat by turning up the air conditioning (which would produce more greenhouse gas emissions), using desalinization technologies that pollute marine environments, raising prices or otherwise excluding vulnerable customers that depend on insurance or other essential services, or giving customers more resources without the incentives to conserve.

This is partly a result of focusing on the specific, current problem at hand while not taking into account the broader repercussions. It is also a result of failing to identify where weather risk and other familiar issues have climate change dimensions.

Identifying the Hotspots

Over the past year, we’ve been following the topic of adaptation through discussions with BSR member companies, leading and participating in workshops and forums, including the U.N. climate talks in Cancun, and examining business responses to the Carbon Disclosure Project on climate risks and opportunities.

In doing so, we’ve found that while climate change impacts are ubiquitous, there are some approaches companies can use to identify and focus on vulnerable “hotspots” in their operations, supply chains, and key markets. Hotspots emerge both as physical locations and features of the company.

In terms of location, companies with operations in Asia, Africa, and Latin America face some of the greatest risks due to the extreme water loss or flooding predicted for those regions. In addition, these areas suffer from a general lack of resources to respond to problems.

In all parts of the world, coasts, flood plains, and ecological boundary zones, including mountains and islands, are vulnerable. In many cases, cities (PDF), as well as settlements where subsistence is marginally viable, are especially risk-prone. Companies should consider how their direct operations and key partners and markets are situated in relation to these physical areas.

As for companies themselves, a key vulnerability is a dependence on natural conditions to foster crops, snow, and other climate-sensitive inputs, which are likely to migrate and, on average, degrade. In general, long-lived and fixed assets, such as mines, as well as extended supply chains and distribution routes, tend to be more exposed to physical disruption.

Finally, lack of transparency is a problem: A combination of weather events and climate-related political actions are increasingly likely to disrupt energy availability and general operations of suppliers and other partners. While companies may be able to take steps to mitigate their vulnerability, they will have a hard time doing so if they are unable to make informed judgments about their partners’ key issues, options, and systems for making decisions.

When companies look ahead, here are some issues that they should tune into:

Communicating about climate risks and opportunities: Investors expect companies to report on physical, regulatory, and other risks and opportunities of climate change through the Carbon Disclosure Project. The U.S. Securities and Exchange Commission has also made informed reporting on climate risks a requirement. Also, working with distressed communities to cope with climate change is an increasingly material issue for annual sustainability reporting.

Meet needs responsibly: The private sector is being called upon to drive an effective response to climate change, ranging from delivering hydration and other growing basic needs, applying finance and information and communications technology to build more resilient infrastructure, and solving the potential problems of maladaptation.

To do so, businesses need to foster connections and discussions that help deliver sustainable solutions to society under dynamic and uncertain conditions.

Create climate-resilient local benefits: Many sources of risk for companies are likely to be found far away from their headquarters and centered in local communities where, for example, vulnerabilities to floods, windstorms, and droughts are growing. These communities need help with local investments to developing disaster-response systems and continuity plans. Companies should look for ways to help their community partners achieve triple-win impacts by reducing the effects of disasters, adapting to climate change, and safeguarding development gains.

Each month through July, we will produce discussion briefs for specific industry sectors on what they are and should be doing about climate adaptation. Each brief will include basic tools and references. As we produce this series, we’ll be holding discussions with BSR members and inviting feedback. We’ll also store our resources and other tools at www.bsr.org/adaptation.

Further Information

Climate change adaptation can be defined as “adjustments in ecological, social, or economic systems in response to actual or expected climatic stimuli and their effects or impacts,” including “changes in processes, practices, and structures to moderate potential damages or to benefit from opportunities associated with climate change.” For more information and a list of suggested reading, visit www.bsr.org/adaptation.

First posted at GreenBiz.

BSR at Cancun: What We’re Watching at the Climate Talks

The sixteenth annual UN climate treaty negotiations are underway in Cancun, Mexico, where my colleague Joyce Wong and I are looking for insights on how business can take the lead ahead of slow-moving governments.  We’re also investigating topics like how companies can best adapt to climate change and motivate people for more climate sustainable consumption.

We’ve been saying for some time that, while the international negotiations don’t directly impact companies, they have a huge indirect effect in that they guide countries’ national and local policies for energy, transportation, and land use. The overall impact of more effective climate policies should be overwhelmingly positive, because it will bring about more regulatory certainty and transparency that enable companies to productively invest in new technologies (not to mention avert potentially dangerous global change). But because climate policy is all encompassing, even positive developments will be disruptive, so it pays to pay attention.

At this point in the talks, there are clear unresolved issues, which include: (1) Finding agreed-upon principles and steps that will guide mitigation efforts following 2012, (2) Determining accountability for implementation of near-term mitigation targets and actions by the more than 70 countries making commitments in the Copenhagen Accord, and (3) Mobilizing the US$30 billion of long-term finance that countries have pledged.

However, as UN’s new climate chief, Christiana Figueras, has warned us, Cancun won’t have a “big bang” result. Decisions that are essential to the process—such as transparency protocols, a “shared vision” of collective emissions goals, and an agreement’s legal details—are likely a year or two off.

Here is what we’ll see if things go as expected over the next few weeks:

  • Country pledges in the Copenhagen Accord will be confirmed, with enhanced detail on key pieces of the spirit of the agreement and how countries will follow through, particularly on the funding pledge
  • An agriculture package launched, building on recent advances in forest protection mechanism and the already finished concise text for the agricultural sector
  • More agreement on handling of green-technology transfers
  • More clarity on the future of the climate negotiations through the UN; that is, whether and how the traditional, 200-country consensus approach, the recent movement with the Copenhagen Accord to focus on a small number of major emitters, and/or the private sector will create the most effective environments for global climate action going forward

What does this mean for business? I’ll cover that in detail in my next post. But I’ll give you a hint—it’s similar to what we said a year ago: For real results, look beyond Copenhagen Cancun.

First posted at BSR.

What New Climate Change Policies Will Mean for Your Business

To read about policy developments taking place this year, see “Looking for Signs Along the Road to Copenhagen.” Listen to advice from Ryan on positioning your business at “Reading the Tea Leaves of Evolving Climate Change Policy.”]

As global leaders prepare to negotiate an updated version of the Kyoto Treaty at the U.N. Climate Change Conference in Copenhagen in December, the big question is whether China and the United States will join the 183 countries that have already signed on. If that happens, we’ll be on our way to a serious global effort to stabilize the climate.

What would this mean for your company? An agreement that includes China and the U.S. — the world’s No. 1 and No.2 emitters — will commit all signatory countries to broad reductions in domestic emissions. Beyond outlining general principles for international cooperation, however, the treaty likely will leave it up to countries to figure out how to do so. Therefore, an evolved global agreement will help speed up and synchronize country-level efforts, but national governments will continue at the helm of climate policy design.

Through that lens, consider the following ways in which policy will impact individual companies, starting with the most direct effects.

1. The Price of Carbon

From global to local, the essence of climate policy is putting a price on carbon emissions, which means either direct regulation by taxes or what’s known as “cap-and-trade” — a requirement for companies to buy tradable permits when they exceed a certain threshold of emissions. Generally, when experts talk about the “regulatory risk” of climate change, they’re referring to direct exposure to just such a price, and this is rightly considered one the most immediate and tangible climate-related risks.

The onset of a carbon price affects companies directly in two main ways. First, for those paying, there is a per-unit price, which, in recent years, has ranged between $1 to more than $50 per ton of carbon in voluntary carbon offset markets and regulatory schemes like the European Union Emissions Trading Scheme (ETS). The Economist suggests that range may move and narrow to between $38 and $63 in the future.

The second direct impact on companies is the uncertainty over what the price will be, and who will have to pay it. This may be more profound than the price impact itself, which is why companies in the U.S. Climate Action Partnership are asking for a system of regulation. Since most emissions come from fossil fuels, regulation is closely related to the supply and the cost of energy. And because corporate energy expenses are so substantial — many companies spend more on energy than they do on taxes — an increasing number of firms see regulation as a good deal, as long as the government clarifies it soon.

2. “Supporting” Policies

In addition to direct regulation, there are various supporting policies. One main type is standards, which include transportation sector fuel economy specifications and efficiency requirements for energy-using products in the information and communications technology (ICT) industry. Standards typically set out requirements for end products, but as international sectoral approaches take shape, standards increasingly will cover production processes as well.

Another main type of supporting policy is technology incentives, which include funding for R&D, the removal of barriers to enter new industries (particularly energy), and financial incentives such as tax credits to encourage companies to generate renewable energy on site.

While the three instruments mentioned so far tend to constrain emissions, there is also a widespread movement to develop “market mechanisms” that create positive incentives by taking advantage of the commodity aspect of carbon. For instance, since a ton of carbon emissions is a ton anywhere, it’s possible to use the market to promote activities being done at the lowest-cost locations — where investments in activities that reduce carbon emissions are cheaper. With market mechanisms, companies can buy reductions when it is cheaper than “making” them. Examples of markets include the U.S. Regional Greenhouse Gas Initiative and United Nations’ Clean Development Mechanism.

Despite the promise of environmental finance-based market systems, two big questions loom: whether and how carbon instruments can be “imported” from elsewhere, and whether forestry-related carbon instruments should be allowed at all.

3. All Policy is Climate Policy

Policies that reduce carbon emissions are not always named as “climate” policies. Case in point: Transportation accounts for a third of emissions in the U.S., so climate will be a significant topic when the U.S. transportation bill comes up for its six-year reauthorization in September. Also, with 20 percent of global emissions caused by forestry and land-use change, and with the food and agriculture sector looking for rewards for good behavior, climate considerations are also likely to come into play in agricultural policy.

In addition, climate issues are becoming ubiquitous in policies that address economic and social issues. For example, the growing risk of international legal and border disputes, the greater likelihood of damaging weather events, and the increasing vulnerability of energy security all mean climate change is a key security policy issue (PDF). It’s no coincidence that the first carbon tax bill — America’s Energy Security Trust Fund Act, which was introduced in the House earlier this month — has “security” in its name. Climate relations are also ground zero for trade issues. Realizing there is a legal basis (PDF) for using trade measures to enforce environmental initiatives, the U.S. and China are debating who is ultimately responsible for cross-border emissions. In other words, climate policy is trade policy.

4. Society as the Policy Authority

Ultimately, policy is part of a general contract between business and society, and social groups may start to hold companies accountable via direct pressure. These actions, according to a recent Harvard paper (PDF), can range from events targeting single companies to strikes and riots deriving from social instability exacerbated by climate change.

To stay ahead of this risk, companies should conduct broad policy assessments of sociopolitical situations, using resources like the Economist Intelligence Unit, the International Country Risk Guide, Business Environment Risk Intelligence, and S. J. Rundt & Associates.

5. Everyone is Affected

According to the Peterson Institute and World Resources Institute, the most vulnerable industries are those that have high energy intensity of production, low potential for efficiency improvement, little ability to switch to low-carbon energy sources, and high elasticity of demand. These include, in particular, energy utilities and heavy manufacturing sectors.

This analysis, like many, focuses on policies that likely will have a direct impact on a relatively small number of players — for example, the U.S. Environmental Protection Agency’s proposed reporting rule covers 85 to 90 percent of domestic emissions by focusing on just 13,000 facilities. Nonetheless, all of the policies mentioned so far may reverberate to impact the fundamental conditions on which all businesses depend. For instance, a carbon tax impacting the price of carbon-intensive energy could lead to reduced availability of carbon-intensive inputs such as steel. Such a tax could also lower demand for products that create higher emissions during their use.

These types of policies could also influence competitive dynamics. For example, incentives for renewables might lower entry barriers for ICT companies in the energy sector, while feed-in tariffs might enable consumer products companies to develop better cost positions over rivals. Also, with investor groups like the Carbon Disclosure Project demanding more information about companies’ self-appraisals of policy risk, those firms that are willing and able to disclose more have increasingly preferential access to capital.

Putting it in Perspective

By no means are the effects of climate policy all negative. The economy as a whole stands to benefit from comprehensive climate policy. Without it, a wide scale of human rights, health, disease, and energy problems will likely result.

But more pragmatically, for most climate policy risks, there is also opportunity. Companies that generate and rely on low-carbon energy are set to prosper, as are those that can exploit technological breakthroughs in resource efficiency and materials. Those firms generating new forms of energy — in particular, renewables — will participate in a massively growing market. Companies in industries that address adaptation problems, such as pharmaceuticals and biotechnology, stand to gain. In the end, as the world’s climate policies are developed and strengthened, there will be important roles for companies from almost every industry.

First posted at Greenbiz.