Forecast for disruption

Executive Education
| The European | 15 April 2020

After a period of unusually heavy rain in August 2010 the banks of the river Spree in Germany broke. At Bautzen, a pretty cathedral city in the state of Saxony, the waters rose into surrounding industrial areas and 1.5 metres was recorded in the local factory of rail firm Bombardier. The floods closed the plant for two months and led to some €155m of damage.

Three years later, the Spree’s banks broke again, affecting properties and businesses nearby. But this time, Bombardier’s plant was unscathed – thanks in large part to passive flood protection measures the firm had put in place. “Prevention remains more effective than cure,” says Eugenie Molyneux, Chief Risk Officer for Commercial Insurance at Zurich, the firm that covers the Bombardier site and advised on the flood prevention measures.

From wildfires to floods to droughts and rising sea levels, the long-predicted effects of climate change are now starting to feel very real. Extreme weather events are becoming more common – in the UK, for example, there have been 17 record-breaking floods since 1910, nine of which occurred after the year 2000.

While weaning ourselves off fossil fuels is the ultimate solution to preventing catastrophic climate change, the impacts of increased carbon dioxide in the atmosphere are already being felt. “We’re going to have to learn live in a planet that looks materially different to what we’re used to,” says Daniel Kreeger of the Association of Climate Change Officers (ACCO). So, how should businesses prepare?

Risky business

While the causes and effects of climate change are well known, making the link between broad, abstract environmental events and business strategy is a challenge. Ms Molyneux of Zurich points to a recent World Economic Forum survey of business leaders which found that while most were concerned about climate change, few saw it as an immediate risk that was about to affect their company’s fortunes.

“Many business leaders have a perception that climate change risk is something that’s ‘down the line’” she explains, “but it’s actually striking harder and faster than we expected.”

In some cases, climate change will trigger weather events that will have an immediate impact on how the company works – as with the floods at Bombardier. However, equally important, but less immediately obvious, are effects on the supply chain. Extreme heat in a supplier country might mean their factories need to be closed, disrupting production down the chain. Similarly, wetter or drier weather could affect the price of foods, while damage to infrastructure could cause countless days of delay and lost productivity.

Businesses need to understand what these risks mean for them. However, as Roger Street, a climate change risk expert at the UK Climate Impacts Programme (UKCIP) points out, “many businesses still struggle to understand how to assess physical risks or adaptation to climate change”.

Tools for climate risk readiness

In many ways, climate change preparation is no different to other forms of risk management, which businesses go through all the time. And, in recent years, there’s been a big growth in the amount of guidance and information on how companies can go about assessing their own risks. The UKCIP, which has helped advise UK businesses on climate change adaptation since 1997 has a five-step wizard: 

Getting started: At this stage, UKCIP advises firms consider what they are trying to achieve by conducting a risk assessment.

Current climate vulnerability: Next up, companies use internal knowledge to understand any major vulnerabilities they are currently facing. Do you have manufacturing plants on a flood plain? Is a major supplier in a drought zone?

Future climate vulnerability: UKCIP then says companies must use publicly available data to assess future risks. Does, for instance, a facility close to low-lying coast need to consider the possibility that the sea levels will rise?

Adaptation options: Now a company understands its current and future risks, it can look at methods of adapting – be that modifying its buildings, or even moving the physical location of assets

Monitor and review: Finally, companies should assess how they are progressing towards their initial goals and then begin the process over again as circumstances change.

The UKCIP’s wizard is just one option and Mr Street notes that there are ever more consultancies that help firms do this kind of process, as well as online libraries and guidance.

What does this look like in practice then? Zurich provides a similar kind of service to help its customers understand their climate change risks and adapt. Ms Molyneux describes how one Australian mining business began implementing this kind of adaptation process.

“They are already working in a drought affected area and they acknowledge that water will become scarcer in future,” she says. Mines typically use large amounts of water, so if they run out, the entire business can collapse. Zurich’s consultants helped the miner understand and assess their climate change risks and potential options. Eventually, the solution they chose was to “build a seawater desalination plant to pump water directly to the mine”. This, Ms Molyneux says, ensures the sustainability of the business even as rain and natural ground water disappears.

While this kind of risk assessment and adaptation is no doubt costly, the benefits likely outweigh the costs in the long run. A 2019 report by the Global Commission on Adaptation puts the return on investment for climate adaptation projects at a ratio of 4:1.

The risks of risk assessments

Given the potential benefits, why isn’t every business in the world rushing to assess its climate change risks? There are plenty of possible reasons, from inertia to ignorance to indifference. However, Mr Kreeger of ACCO points out that there are some perverse barriers to companies assessing their risks.

In the US, publicly traded companies are obliged to disclose any business risks to the Securities and Exchange Commission (SEC). But currently, it’s not obligatory for companies to undergo climate change risk assessments. This means that even if a firm does want to assess its risk, it might fear doing so, because it would then be obliged to reveal its risk and face a drop in its share price. “If the marketplace may punish you for disclosure, you’re reluctant to go through [risk assessment] in the first place,” Mr Kreeger says. Until all companies are obliged to conduct a risk assessment, many firms will avoid doing so for exactly this kind of reason.

A human capital issue

Despite these barriers, a growing number of companies are coming to realise that they need staff with the skills and know-how to help them navigate an increasingly unpredictable environment. “We see climate change as a human capital issue” says Mr Kreeger. Staff are needed who “understand the risks to the business, who have foundational knowledge of climate science. They need to understand organisational change principles, what policy tools are available to them”, not to mention the ability “to communicate this to the rest of the business”.

At present, Mr Kreeger explains, few businesses really have such a standardised role as “climate change officer”. But that’s starting to change. Dr Mirabelle Muûls is the Programme Director of an MSc in Climate Change, Management & Finance at London’s Imperial College. The course, which is in its fourth year, is designed “to train future leaders in having both the scientific knowledge of climate change, its impacts, causes, and an understanding of business and finance”.

Past graduates have gone on to a wide range of industries, from startups to consultancies, finance jobs and engineering roles at energy firms.

“It’s reassuring to see that businesses are really waking up to the problem,” she says. Many companies are now hiring graduates who know about these issues and how to deal with them.

Cause for optimism

The sheer scale of climate change can feel overwhelming and action often seems to happen at glacial speed. All the same, there are signs that things are moving in the direction. Mr Kreeger notes that the US state of Maryland recently got upgraded to a triple-A rating by credit ratings agencies after conducting a thorough assessment of its climate risks. The rating agencies rewarded the state government precisely because it was taking its climate risks seriously, and therefore showing it was a reliable organisation to lend to.

It’s a small start, but this kind of model could become, according to Mr Kreeger, “a framework which catalyses action” . Which might be just what we need.

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