2019 is delivering a crop of extreme weather records. Maximum historic temperatures have been equalled or surpassed in the recent July European heatwave in the UK, Germany, Belgium and the Netherlands. There is little doubt that these events incorporate the signature of global heating—they cannot be fully or simply explained as random. Climate change is a direct threat to business via extreme weather events, but it is also a risk multiplier of many other threats: food security, water security and civil unrest to name a few.
According to the Intergovernmental Panel on Climate Change, climate change will compound with other socioeconomic drivers of change (changes in population, age, income, technology, relative prices, lifestyle, regulation, governance, and many other aspects of socioeconomic development).
The Paris Agreement on Climate Change seeks to “strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty, including by…. Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change.”
Optimistically, and despite some recent extraordinary commitments from the world’s industrialised nations, we are on target for 3°C of warming by the end of the century—well above the Paris goal.
This increase may not sound a lot but in fact: (a) an extra 2-3°C warming is a large amount, considering the average surface temperature in the pre-industrial era was 14.5°C and is now 15.3 (0.8 °C higher); (b) this is a global average and many places will see multiples higher regionally; and (c) a change in the mean of this magnitude increases the chances of extreme events (drought, floods, disease, etc.) significantly, typically making the 1 in 100 year event the 1 in 10 to 20 or 30 year event.
To some extent natural systems adapt naturally to climate change. Human systems do, too, but unlike the nonhuman living world, human systems also have the capacity for planned—or anticipatory—adaptation. Insects don’t plan. Businesses do.
Businesses should have two modes: offense and defence. Not only should they be seeking to limit their contribution to global emissions (radically and rapidly reducing their carbon, water and waste footprints), but they should also be building their own capacities and those of their sectors to become more resilient in the face of the increased likelihood of extreme weather-related disruptions.
It takes about 20–40 years for an idea to become reality (as we have seen with battery backup systems, insurance plans for coastal flood zones, the circular economy, etc.). The notion of climate change as both a risk multiplier and an opportunity multiplier for business is about 10 years old, meaning it is relatively young. The re-insurance and insurance markets got it a decade or more ago—well, risk is their business after all. Next came the banks who began, for example, questioning loans for renewable energy projects from novel perspectives.
Take wind farms as an example. Everyone knows they are part of the solution and a good, solid green investment. But what does climate change in the form of windier conditions do to the project spreadsheet over 25 years? We can likely predict more instances of extreme weather cut-offs and potentially more maintenance expenses. The same goes for glacier-fed run of the river hydro schemes in South America. Will there be much flow once the glaciers have gone?
According to McKinsey, there are value chain risks (physical, prices, products) and external stakeholder risks (ratings, reputation, regulation). A well-known example of physical risk in the value change occurred when Western Digital Technologies, a major supplier of hard disk drives, was severely disrupted in 2011 after flooding in Thailand, where most of its production was located. This disruption in turn had global implications for computer manufacturers.
Climate change exacerbates price volatility, due to both extreme weather events but also the rush for new materials being used for new solutions (e.g. rare earths used in the manufacturing of solar panels). Product risks can destroy or create new markets overnight: coal markets are declining, winter sports markets are volatile and the cattle outlook is under threat as diets change. The need for carbon disclosure is an example of a ratings risk where companies may face higher costs of capital or even product obsolescence, like light duty vehicle gasoline and diesel engines.
Globally, there are myriad climate support policies, like subsidies for green energy, as well as penalties (e.g. carbon taxes or cap and trade programmes) for greenhouse gas emissions. These are subject to sudden and sometimes profound change, so the policy space is a risk in itself. Calls for divestment in managed funds (e.g. pensions) from fossil fuel intensive companies and sectors is a good example of the reputational risk at work. Enlightened companies are leading on carbon disclosure risk registers, winning awards and gaining friends.
From obvious supply chain disruptions related to extreme weather events to more subtle ways of changing culture and questions over the fundamental purpose of business in a climate emergency, climate change is changing business strategies in a plethora of ways.