How Businesses Can Plan for the Unpredictability of Climate Change

With managers across industries under pressure to develop sophisticated views about how climate change will impact their companies, it might seem natural to look to the insurance industry for guidance on how to act and communicate about risks and opportunities.

After all, with climate change threatening to increase the severity of humanitarian crises, economic disruptions, and weather-related disasters — which, in the last half century, have cost more than a trillion dollars and killed more than 800,000 people (PDF) — the insurance sector is being called on (PDF) to play a special role in helping society to adapt to climate change.

Unfortunately, even the insurance industry lacks the coveted crystal ball that would preview exactly how climate change will impact us. That’s partly because prediction works by projecting future events based on past experiences, such as showing what the average distribution of the next thousand hurricanes in the Gulf of Mexico might look like. Climate change variables can be factored in, but what to include and how much to adjust them remains largely guesswork.

Even if we had the parameters to guarantee more statistical accuracy, we would still be at the mercy of what matters most: low-probability, high-consequence events that happen once in a generation, such as this summer’s heat wave in Russia and floods in Pakistan. Such outliers are hard to pinpoint in advance, yet these are precisely what the Intergovernmental Panel on Climate Change (IPCC) says business should be most worried about.

As a result, while climate science provides evidence of general trends, we are still a long way from being able to predict specific climate events. In lieu of precise predictions, a key to effectively managing the physical effects of climate change is preparedness, which can be achieved through developing literacy, identifying plausible impacts, evaluating priorities, and building resilience.

Practical Frameworks for Climate Change Preparation
•  U.K.-based Acclimatise’s three themes for senior executives (PDF): The group’s 10 questions cover risks, opportunities, responses. 

•  Alberta Sustainable Resource Development’s four-part framework (PDF): Scope and prepare, assess vulnerability, assess risk, and identify options — and integrate these into strategic management.

•  Economics of Climate Adaptation Working Group’s five-part framework (PDF): Identify risk, calculate expected loss, build response portfolio, implement, and measure.

•  Pew Center on Global Climate Change’s three questions (PDF): Is climate important to business risk? Is there an immediate threat, or are long-term assets, investments, or decisions being locked into place? Is a high value at stake if a wrong decision is made?

•  Risk Management Solutions’ four-module natural hazards model (PDF): Define hazard phenomena, assess hazard level, quantify physical impact, and measure monetary loss.

Developing Literacy

For business, developing literacy means understanding the mechanics by which climate change is likely to affect your company, and how to manage uncertainty.

In that sense, while climate change is expected to produce negative effects overall, there will also be important new societal needs related to climate change’s direct effects on water, food, health, ecosystems, and coastal areas that businesses can focus on. These impacts can be thought of as both risks (your workforce becoming increasingly susceptible to disease) and opportunities (the chance to develop and distribute health-improving solutions).

Future climate impacts are a function of three things:

1. Impacts from today’s climate, which may pose real risks, such as windstorms or floods, even if they haven’t materialized
2. The potential effects of climate change, which could multiply those threats
3. Development paths that put more people and assets in harm’s way

To develop expectations about total future impacts, business can use various techniques for characterizing the future, such as scenarios, storylines, analogues, qualitative projections, sensitivity analysis, and artificial experiments such as thought exercises. These all offer different tools. For example, analogues use past events to anticipate how communities will respond in the future, and storylines create narratives about how the company might logically evolve in response to climate-related economic trends.

Identifying Impacts

Given the most plausible physical effects of climate change mentioned above, which impact virtually all industries and regions, the next step is to identify where and how they might affect the company the most.

The answer depends on a range of geographic, market, and sociopolitical factors. As a starting point, the IPCC suggests that the most intense business impacts are likely to result from extreme weather, especially in coastal and flood-plain regions, in areas where subsistence is at the margin of viability, and near boundaries between major ecological zones.

With respect to business operations, impacts are most likely when there is dependence on longer-lived capital assets, (such as energy), fixed resources (such as mining), extended supply chains (such as retail and distribution), and climate-sensitive resources (including agricultural and forest products, water demands, tourism, and risk financing).

Finally, impacts are most likely in sociopolitical environments where substantial key stakeholder groups are based in poor communities, especially in areas of high urbanization. (For more details, review the IPCC’s report on “Impacts, Adaptation, and Vulnerability.”)

Evaluate Priorities

Once a set of potential impacts has been identified, they can be used to evaluate the relative areas of concern. One way to structure this assessment is to evaluate the following conditions independently: the intensity of likely climate change hazards, your company’s and its stakeholders’ vulnerability to those hazards, and the values at stake, both financial and human.

You can combine these to form probabilistic values for each potential impact, and then compare these impacts against each other to provide a picture of the most important expected effects across the organization.

Such a study is accessible to most companies. For example, a combination of desktop research, interviews with experts, and a facilitated discussion with management could provide a good estimate of the conditions mentioned above. This, in turn, can form an appropriate initial assessment for coverage in an annual report or in your company’s reporting to the CDP in May. To make the conclusions actionable, aim less for an abstract list of calculations and more for judgments that yield a rank-order priority set.

Build Resilience

A final step in preparing for climate change is to build resilience, which involves two steps. The first is to make “if-then” decisions. For instance, if energy prices quadruple, a drought occurs near a water-intensive plant, or a key ingredient is listed as endangered, what would your company do? This assessment should include both traditional disaster planning as well as defining contingencies for sudden changes in market needs or necessary supplies.

By extension, this is the time to consider how your company should react to plausible changes that could impact the whole enterprise, such as breakthroughs in energy information technology or aggressive climate policies in China’s next five-year plan.

Of course, this should also include a review schedule: what to watch for, and when. In sum, managers should be ready for anything, or at least what’s plausible.

The second step is taking proactive measures now, or if not now, then timed with and integrated into new capital investments. These measures include ensuring that new buildings and infrastructure meet codes to withstand extreme events; improving land-use planning, such as by limiting development in at-risk areas; and preserving wetlands, forests, and other natural ecosystems that provide cost-effective natural protection against storms and erosion.

When investing in these measures, combine adaptation with mitigation efforts wherever possible, such as by building green, and be wary of paths that are increasingly energy and water intensive because such resources will likely be under increasing strain.

It’s also important to pay special attention to people in poor communities and developing countries, as they are likely to be most affected by climate change, and therefore have growing needs for companies to fulfill.

First posted at GreenBiz.

10 Climate Trends That Will Shape Business in 2010

As 2010 begins, there are looming questions about climate change action: Will the political agreement made in Copenhagen in 2009 be developed by the next “COP” meeting to include detailed targets and rules? Will those targets and rules be binding?

What will happen with the U.S. Senate’s vote on cap-and-trade? Will U.S. public opinion about climate change — which has a major impact on how the Senate votes — ever begin to converge with science?

There’s no doubt that the year’s most interesting stories could turn out to be “black swans” that we can’t currently foresee. But even amid the uncertainty, there are some clear trends that will significantly shape the business-climate landscape.

1. A Better Dashboard

Carbon transparency isn’t easy — it takes science, infrastructure, and group decisions about standards to allow for more accurate information. We have started moving in that direction. Web-based information services provide illustrations: country commitments needed for climate stabilization, indications of where we are now, and the critical path of individual U.S. policymakers.

Meanwhile, more attention is being paid to real-time atmospheric greenhouse gas (GHG) concentrations, remote sensing technology that tracks atmospheric GHGs, and a new climate registry for China. As these data tools become more available, business leaders should begin to see — and report on — a clearer picture of their company’s real climate impacts.

2. Enhanced Attention to Products

There are signs that more consumers will demand product footprinting — that is, a holistic, lifecycle picture of the climate impacts of products and services ranging from an ounce of gold to a T-shirt or car. Fortunately, a new wave of standards is coming. The gold-standard corporate accounting tool, the Greenhouse Gas Protocol, aims to issue guidance on footprinting for products and supply chains late in the year, and groups like the Outdoor Industry Association and the Electronics Industry Citizenship Coalition plan to publish consensus-based standards for their industries in the near future.

3. More Efforts to Build Supplier Capacity to Address Emissions

With more attention on products comes an appreciation of product footprinting’s limitations. Many layers of standards are still needed, from the micro methods of locating carbon particles to time-consuming macro approaches defining common objectives through group consensus. Accurate footprinting that avoids greenwashing requires statistical context, especially related to variance and confidence levels, that companies often think stakeholders don’t want to digest.

Progressive companies such as Hewlett Packard, Ikea, Intel, and Wal-Mart are therefore pursuing partnerships with suppliers for carbon and energy efficiency, and they are focusing their public communications on the qualitative efforts to build supplier capacity–as opposed to pure quantitative measurements, which can imply more precision than really exists.

4. Improved Literacy About the Climate Impacts of Business

The bulk of companies’ climate management falls short of directly confronting the full scale of effort required to address climate change. That’s partly because organizational emissions accounting tends to treat progress as change from the past, as opposed to movement toward a common, objective planetary goal. But companies are becoming more aware of the need to be goal oriented. Firms such as Autodesk and BT have begun bridging this gap by illustrating that there is a common end–which is measured in atmospheric parts per million of emissions–and that company metrics can be mapped to their share of their countries’ national and international policy objectives toward them.

5. More Meaningful Policy Engagement

Related to the previous item, more companies realize that pushing for the enactment of clear and durable rules to incentivize low-carbon investment is one of the most direct things they can do to stabilize the climate. Therefore, more companies are engaging earlier — and in more creative ways — in their climate “journey.” There is growing realization that you don’t have to “reduce first” before getting involved.

There is also a general awakening to the fact that strong climate policy is good for jobs and business. Already, more than 1,000 global companies representing $11 trillion in market capitalization and 20 million jobs (PDF) agree that strong climate policy is good for business. There has never been a better time to get involved, especially in the United States, where the Senate is expected to vote on domestic legislation by Easter. Effective corporate action can help fence-sitting senators (PDF) gain the support they need by educating the public in their districts about the importance of strong climate policy.

6. Higher Stakeholder Expectations

As climate management enters the mainstream, stakeholders expect companies to do more, and watchdogs will find new soft spots. Companies should be prepared for new stakeholder tactics, such as the profiling of individual executive officers, who are perceived as having the greatest impact on company positions, and heightened policy advocacy efforts. The media’s role in promoting public climate literacy will continue to rank as an important part of stakeholder expectations. Currently, the U.S. public, which plays an important role in the critical path to a global framework, has far less confidence about the importance of acting on climate than scientists do, and the media can help educate them.

7. Increased Power of Networks

Economists see energy efficiency as a solution to 40 percent or more of climate mitigation, and with the technology and finance already available globally, companies can play a significant role in accelerating progress. While the price makes the energy market, and policy helps to set the price, companies like Walmart have shown that creating expectations for performance improvement, while providing tools and training, can help suppliers and partners clear the economic hurdles they need to get started. After this initial “push,” experience shows that suppliers take further steps on their own. As more companies take on supply chain carbon management, watch for lessons on how to do it effectively.

8.    More Climate Connections

Energy efficiency, which constitutes the core of many companies’ climate programs, offers a platform for broader resource-efficiency efforts. We expect to see many companies expand their programs this year to address water. Given that this is the “Year of Biodiversity,” we can also expect more movement related to forestry and agriculture. The nexus between climate change and human rights is also likely to become a hot topic, building on momentum developed during the run-up to Copenhagen.

Finally, watch for the climate vulnerability of mountain regions to gain attention, due to increased environmental instability, disruption of natural water storage and distribution systems, and stress on ecosystem services in regions near human populations.

9. Greater Focus on Adaptation

Climate management has already broadened to include adaptation, and this will receive increasing attention in 2010. This is already evident in company reporting, as evidenced by responses to the Carbon Disclosure Project (see answers to questions 2 and 5 about physical risks and opportunities). Companies are addressing many adaptation-related issues, including insurance, health, migration, human rights, and food and agriculture. It is important to note that adaptation efforts can–and must–also support mitigation, as in the case of resource efficiency.

10. More Political Venues Up for Grabs

The Copenhagen Accord (PDF) was produced only during the last few hours at COP15, as part of a last-ditch “friends of chair” effort involving around 25 countries. This nontraditional process proved to be an effective way to move swiftly in getting broad support, yet still failed to achieve consensus in the general assembly, with a small handful of nations vetoing due to a few apparently intractable disputes. In consideration, there are growing calls for additional forums beyond the regular United Nations Framework Convention on Climate Change process, to offer more responsive action in developing the global climate agreement needed.

Most notably, attention is on the G-20 countries, a group that comprises the vast majority of emitters and has shown that it can move efficiently, even while avoiding the troublesome distinction between developed and developing nations. Country associations are also changing. For example, instead of “BRIC” (Brazil, Russia, India, and China), we are more often hearing about BASIC (BRIC minus Russia plus South Africa) and BICI (BRIC minus Russia plus Indonesia). The point is, before Copenhagen, most thought updating Kyoto meant developing a global treaty through the formal U.N. structures. Now there is growing appreciation of the opportunity for complementary efforts, and new countries are coming to the fore in multilateral engagement.

In 2010, business leaders will be considering their best next steps after Copenhagen. At the same time, as BSR President and CEO Aron Cramer has written, while an overall framework agreement is important, we need to look beyond forums like Copenhagen for real results on climate — and that means looking to business. Business is important for two reasons: By engaging in policy, business can help increase the likelihood that policymakers will develop a strong framework. And by innovating and committing to progress, business will help a treaty achieve desired results.

At BSR, we will be tracking the opportunities related to these trends and working with business to focus on innovation, efficiency, mobilization, and collaboration for low-carbon prosperity. For more information about how your company can contribute, contact me at rschuchard@bsr.org.

First posted at GreenBiz.