President Obama has recently stated that climate change must become a high priority. He wants the US to be a world leader in addressing climate change, such as reducing greenhouse gas (GHG) emissions significantly. Many polls show that a solid majority of Americans support this movement. A growing number of companies, cognizant of this fact, have tasked their Environmental Groups to address climate change.
A number of articles in CCES have discussed the many financial benefits to a company that reduces its GHG emissions. That aside, another climate change issue that companies must address is the impact of the physical and financial effects of climate change on their business; in other words, to assess climate change risk. Nearly all businesses have assets, operations, and a supply chain vulnerable to the effects of climate change, not to mention its effects on markets. How does one develop the ways to assess the degree of and for developing strategies to minimize climate change risk?
This is not meant to be an exhaustive analysis of climate change risk. Software and other options exist to be more exact. This is meant to be a guide for those starting out. Here are 6 steps to effectively begin to assess and address your climate change risk.
1. Determine your current climate change risk factors. Develop an analysis of your company’s assets, operations, supply chain, and customers and which ones are most at risk to the likely adverse effects of climate change (i.e., extreme storms, rising sea levels, shortages of water or other natural resources, etc.). List these specific areas in writing, including their location, and determine which hazards are likely to increase in particular geographic areas. For example, if you have a manufacturing plant or a key supplier has one in, say Florida or the Caribbean, then you need to be concerned about the probability of a growing frequency of extreme storms. Begin by assessing risk qualitatively, but eventually attempt to quantify or at least rank the business areas of greatest adverse risk. Rankings should be made in business terms: such as risks that are existential, those that may affect worker lives, those that may cost your business market share or reputation, as well as those resulting in direct costs (asset damage).
2. Assess where you stand now. Part of this ranking of your key areas of climate change risk is to determine if impacts are already occurring or may come soon. For each critical risk area identified, research recent and historic events to determine if the impacts are already occurring. For example, research the historical extreme weather events of a potentially vulnerable plant over the last 50 to 100 years (if data is available) to determine whether extreme weather events are already occurring more frequently.
3. Now look forward to assess future risk of climate change impacts. Assess those assets, operations, etc. identified for potential climate change risk for projected changes caused by climate change in the future. How far into the future is up to your firm. For example, computer models exist to predict temperature rise in many areas of the world caused by climate change and can be used to predict future yields of necessary supplies provided by agriculture. Projections have been estimated for sea level rise. Determine if your assets or supply chain may be even more vulnerable in the future to flooding or damage if sea level rises by the amount projected.
4. Go back, re-rank and plan for your riskiest vulnerabilities. Given the historical and potential future adverse impacts of climate change that have been determined, now re-rank these at-risk assets, operations, supply chain, etc. using your criteria above (existential, reputational, asset damage). Estimate which of these are of potentially greatest risk to loss or damage in the future.
5. Determine reasonable steps to effectively reduce risk. There are likely multiple options that can be implemented to reduce your risk. Each may reduce risk differently or by a different amount and each has a cost (although there may be side benefits, too). Remember, it is essentially impossible to reduce risk to zero (“Mother Nature”). And of course, you will be limited by budgetary factors. Therefore, determine what level of risk may be acceptable to your company. For example, what are the costs involved and risk reduced of building a sea wall to protect an asset in a coastal, hurricane zone? What may the costs be to “raise” that facility or its key assets a number of feet to avoid flooding? What may the costs be to relocate some of its operations to a different facility in a much lower risk zone? What may the costs be to shut down the plant altogether and move all operations elsewhere? This information and good what-if scenarios will enable your company to better direct resources for more effective risk reduction.
6. Climate change risk should be a part of your total business risk determination. One thing that is certain is that as businesses and the Earth change, climate change risk will also change. As a company changes its customer base, supply chains, acquires other companies or sheds products, this will affect their climate change risk. Of course, the science of climate change and knowledge of risk will change, too. Therefore, this risk analysis should not be “stored away.” This must be re-examined and re-calculated every few years or if the company undergoes major changes. Climate change risk should be part of overall corporate business risk assessments.
For example, when determining whether to buy a company, its climate change risk should be assessed. Does that company have many assets or suppliers in vulnerable areas? Do they use coal, for example, to produce power for its operations? Might your company need to spend a large quantity of resources to address the risks it is taking on or comply with potential future climate change or energy regulations? A robust climate change risk assessment may affect your offer price. I managed a project where a company wanted us to assess the climate change risk of one it was considering to acquire that operated a number of coal-fired power plants. Their greatest concern was what might its future costs be due to potential future climate change or environmental rules that would require expensive controls on emissions? These costs, we showed, could be quite significant, and were presented to the client. Understanding the need to spend many of millions of additional dollars per year in the future, they reduced their bid price. They lost the bid, but afterwards contacted our firm and thanked us. Given the huge potential future cost and risk, this was the best “loss” of a bid they ever had.
CCES can help your firm assess climate change risk and determine and implement common-sense strategies to reduce the risks and get other financial benefits at the same time. Contact us at karell@CCESworld.com or at 914-584-6720.