Adapting to Climate Change

2.0 Enterprise Risk Management

Mark Trexler, Laura Kosloff

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351275507
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Most companies do not yet recognize what it means to adapt to future climate change, and do not yet see it as a business priority. Adapting to Climate Change tackles two key questions facing decision makers: 1) Is adaptation worth it to me? and 2) If it is worth it, can I really tackle it?

If a company has reason to worry about the potential impacts of weather on its operations and supply chains, it probably has cause to worry about climate change. However, "adapting to the weather" is not the same as incorporating climate change adaptation into corporate planning. In the former a company is managing conditions they are already experiencing. The latter involves preparing for forecasted impacts of climate change. Focusing on today's weather and not tomorrow's climate leaves a lot of risk on the table, especially if the climate continues to change faster than many climate models have projected.

The uncertainties associated with forecasting climate change on a timeframe and at a scale that is relevant to corporate decision making can appear daunting. It is not necessary, however, to have perfect information to advance corporate preparedness for and resilience to climate change. Companies can improve their ability to make robust decisions under conditions of uncertainty without perfect information. A Bayesian approach to reducing uncertainty over time can cost-effectively support companies in understanding and managing many potential climate risks and can avoid the need to depend on future predictions. Instead, initial effort can focus on where a company will have confidence in its analysis and the ability to influence its level of risk, namely in assessing its exposure and vulnerability to climate hazards. As the hazards themselves become more clear, risk management strategies can be quickly adapted.

CHAPTER 1
Introduction

PUBLIC DISCUSSION OF ADAPTATION and resilience to extreme events has picked up dramatically in the aftermath of Hurricane Sandy, which hit the northeastern United States in late October 2012. The public discussion has also drawn in the business community, based on a slowly growing perception among business leaders that the weather is changing in ways that put business infrastructure and supply chains at risk. In October 2012, for example, the global trade association of oil and gas companies (IPIECA) held its first internal workshop to explore climate change adaptation efforts and needs in the sector.¹

This DōShort is not an adaptation how-to manual. Beyond the fact that adaptation efforts will have to be highly context-specific, and the growing recognition by business of changing weather patterns, most companies do not yet recognize what it means to adapt to future climate change, nor do they see it as a business priority. Rather, this DōShort will address two key questions that corporate executives should be able to answer in the affirmative before they can prioritize a topic like climate change adaptation:²

• Is it worth it to me as a corporate decision-maker to tackle this topic?
• If it is worth it, do I have the ability to achieve my stated objectives, risk reduction or otherwise?

The first of these two questions encompasses the broader aspects of corporate climate change risks that we tackled in The Changing Profile of Corporate Climate Change Risk (Trexler and Kosloff, DōSustainability, Oxford, 2012). We introduced several ways that climate change is linked to business risk (and opportunity):

• Physical risks, including direct impacts of climate change on company operations, supply chains, and financial performance, among many other variables. Physical risk is based on existing and forecasted climate change; this DōShort focuses on physical risk.
• Brand risks, including the impact of consumer and stakeholder perceptions on corporate competitiveness. Brand risk (and perceived branding opportunities) has been a primary driver of corporate mitigation efforts to date.
• Policy risks, e.g. the impacts of climate policies and regulatory mandates on corporate competitiveness, and the susceptibility of business models to policy-driven variables like a price on carbon.
• Structural market risks, including changing supply and demand for company products and services in a carbon-constrained world, and responses to changing rates of technology innovation.
• Liability risks, including for retroactive or future greenhouse gas (GHG) emissions. We consider liability risks separately from policy risk because liability could also arise through litigation as well as from policy measures.

In our 2012 DōShort we also framed several climate change risk scenarios that help bring relative risk probabilities into the discussion. In this new DōShort, we supplement that framing to include a rough estimate of the magnitude of adaptation needs associated with each scenario:

• Scenario 1: Issue collapse. The pressure for policy action, and the need to materially adapt to climate change, could come to an end if the current understanding of climate change science were to reverse course. The best available science suggests this is a very low probability scenario.
• Scenario 2: Stay the (policy) course. This scenario involves pursuing a wide range of policies and measures, but at a level too low to stabilize greenhouse gas (GHG) concentrations in the atmosphere. As a result, CO₂ concentrations continue to rise, reaching 700–900 parts per million (ppm) by the end of this century. The past 25 years of climate policy efforts suggest that this scenario constitutes the most likely ‘Business as usual’ scenario. Adaptation needs are high and grow dramatically over time.
• Scenario 3: Technology-led transition to a low carbon economy. In this scenario, we avoid dramatic climate change through accelerated rates of technology development and deployment, even in the absence of aggressive public policy (including material carbon pricing). Even technology optimists, however, emphasize the need for a supportive technology policy framework, including internalization of a material carbon price to support technology deployment decision-making. Thus, this is a low probability scenario, but it would substantially reduce needed adaptation as compared to the ‘Stay the policy course’ scenario.
• Scenario 4: Policy-driven atmospheric stabilization. In this scenario, we stabilize atmospheric CO₂ concentrations between 450 and 650 ppm (they are at 400 ppm today). The necessary political will would most likely result from public outrage associated with extreme climatic events, and triggering of a Climate Response Tipping Point (CRTP).³ The probability of this scenario seems likely to increase over time as climate change manifestations become more obvious. The longer it takes to get to the CRTP however, the greater the anticipated adaptation needs.
• Scenario 5: Policy-driven return to 350 ppm CO₂. This scenario sees CO₂ concentrations reaching 450–550 ppm in the atmosphere, but we are then able to return concentration to 350 ppm through aggressive policy and technology interventions (350 ppm often being characterized as the level needed to protect the world’s oceans from excessive acidification). Today’s best available information suggests this is a very low probability scenario, with complicated implications for adaptation needs since it’s hard to know how the climate would respond to this scenario.

Potential adaptation needs range widely across these scenarios. The most likely scenario (‘Stay the policy course’), also results in the greatest magnitude of needed adaptation. We focus in this DōShort on this ‘Business as usual’ scenario, and ask how companies can best answer their ‘is it worth it, can I do it’ questions using the best available information, and based on accepted risk management principles.

While we focus in this DōShort on the physical risks of climate change, physical risks are not the only climate risks companies face. Indeed, the ‘Stay the policy course’ scenario could easily generate a ‘risk double whammy’, starting with climate change adaptation needs, followed by (when the Climate Response Tipping Point is reached) much more radical mitigation mandates than most companies have ever anticipated.

Given the current state of global climate policy, however, climate change itself may well be the more material near-term business risk for most companies and regions, requiring a growing risk management response. Our exploration of corporate climate change adaptation is broken into four sections:

1. An overview of climate change risk and the adaptation response.
2. Framing adaptation from a business perspective.
3. The needs and barriers of an adaptation response.
4. Developing an ‘adaptive’ enterprise risk management strategy.

In our experience, it is easier for corporate decision-makers to arrive at an affirmative answer to the ‘is it worth it’ question when it comes to climate risk than to the question of ‘can I do it’, particularly when it comes to climate change adaptation. The uncertainties associated with forecasting climate change on a timeframe and at a scale that is relevant to corporate decision-making can appear daunting. A key step in answering the ‘can I do it’ question, however, is to properly frame what ‘it’ is. Coming up with a low-risk high-certainty adaptation strategy where the results of cost–benefit analysis suggest clear courses of action for ‘climate proofing’ a company’s assets and supply chain for decades into the future is simply unrealistic. We shouldn’t let the perfect become the enemy of the good, given that reducing uncertainty and risk are achievable and desirable business objectives. After all, climate change is not the only topic for which we cannot predict the future with certainty (indeed, are there any?).

CHAPTER 2
Climate Change Adaptation: An Overview

CLIMATE CHANGE MITIGATION and climate change adaptation are generally considered distinct topics, mitigation being characterized as reducing climate change hazards, and adaptation as reducing one’s exposure and vulnerability to those hazards.

Whether responding to public policy aimed at mitigating climate change, or to the physical impacts of climate change on their operations, companies have to adapt their business strategies to the risks and opportunities of the changing environment in which they operate. In principle, the concept of ‘business adaptation’ to climate change could encompass business responses to policy as well as physical risks. In this volume, however, we will use the term more narrowly, focusing on adaptation to the physical impacts of climate change.

Any useful discussion of adaptation to climate change requires that we start with a common understanding of how we are defining the term. For this DōShort, we turn to the Intergovernmental Panel on Climate Change which defines adaptation as ‘initiatives and measures to reduce the vulnerability of natural and human systems against actual or expected climate change effects’.⁴

The need to adapt to climate change has been anticipated since climate change became a topic of political and policy discussion more than 2...