The past several years have seen a steady transformation of business attitudes and behavior on climate change.
Faced with the prospect of new regulations, increased pressure from shareholders and changing consumer demands, many companies are developing comprehensive corporate strategies to address new climate-related risks and opportunities. Companies have set internal greenhouse gas reduction targets, developed new low-carbon products and services, and become increasingly engaged in the national policy debate.
Despite these actions, businesses have been relatively slow to address one critical piece of the climate challenge: adaptation to the physical impacts of climate change.
As with most climate-related issues, adaptation can initially appear complex. Some businesses are reluctant to take it on because it adds a new layer to the existing challenge of preparing for regulatory changes and shifting markets. Meanwhile, projections of physical impacts of climate change are often characterized by uncertainty and extended time horizons.
A new report from the Pew Center on Global Climate Change, “Adapting to Climate Change: A Business Approach,” attempts to break down the adaptation challenge to more tractable components. Authored by Frances G. Sussman and J. Randall Freed of ICF International, the report builds a clear business case for adaptation, presents a screening process companies can use to assess climate-related physical risks, and provides three case studies of companies in the Pew Center’s Business Environmental Leadership Council (BELC) that have taken action on adaptation.
The business case rests on the notion that early preparation can prevent, or at least reduce, future losses from climate-related impacts. Many of these projected impacts, including sea level rise, increased incidence and severity of extreme weather events, and prolonged heat waves and droughts, could have serious consequences across a range of businesses.
For example, higher demand for air conditioning during prolonged heat waves could stress and possibly overwhelm the electricity grid; longer and more intense rains could restrict access to construction sites and slow productivity in the buildings sector; and extended drought could render large swathes of previously arable farmland unusable. While some sectors face greater risks than others, all businesses face the possibility of property damage, business interruption and changes or delays in services provided by private or public infrastructure.
The report stresses the importance of proactive adaptation, or recognizing and acting on threats before they occur. This means relying less on historical trends and past decisions to guide business planning, and instead relying more on the anticipation and analysis of projected future impacts.
Proactive adaptation will initially be more difficult but, ultimately, less costly for most businesses to execute than a strictly reactive approach. Consider, for example, the cost of moving an existing manufacturing facility further inland to avoid damage from rising sea levels compared to the cost of conducting a preliminary study to select a less vulnerable construction site. The guiding principle is a familiar one — an ounce of prevention is worth a pound of cure.
Businesses that begin evaluating potential physical risks will also be better positioned to exploit climate-related opportunities. For example, some tourist regions may benefit from an extended spring and summer recreation season. Biotechnology companies could profit from early development of new seed and other agricultural products that help crops withstand new climatic extremes. Melting ice could open new shipping routes in the Arctic. While these opportunities exist across various sectors of the economy, it is important to note that the Intergovernmental Panel on Climate Change made it clear that climate change will almost certainly result in net costs to society, with these costs growing steeper over time as temperatures increase.
The Pew Center report lays out a screening process companies can use to evaluate the potential physical risks of climate change and decide if more action is needed. In brief, the first step is to determine whether climate is an important factor in business risk. If the answer is yes, the next step is to determine whether climate change presents an immediate risk or threatens assets and investments over a longer-term horizon. The final step is to determine the cost of a wrong decision. If the costs are large, then a more comprehensive risk assessment that looks in greater detail at climate projections and their impact on the business may be warranted.
Depending on how these questions are answered, the screening process will lead to one of three possible outcomes: 1) climate change poses a significant risk that should be managed in the short term; 2) climate change poses a potential risk that should be monitored and reassessed over time; or 3) climate change does not appear to pose a risk and no further analysis is required.
A key message from the report is that companies should take a broad view of climate risks as they conduct the screening process. This means going beyond core operations to include a review of the entire value chain, along with broader supply and demand networks such as electricity, water and transportation infrastructure. A manufacturing plant may escape direct damage from a major storm but still face business interruption risk if transmission lines delivering power to the facility are knocked out, or roads and highways surrounding the facility are left inoperable.
While adaptation is a new issue for many companies, there are some notable exceptions. Three of these are highlighted in the report:
- A New Orleans-based utility, Entergy, suffered $2 billion in losses from Hurricanes Katrina and Rita and has begun relocating important business operations to areas less vulnerable to severe weather events. Entergy also recognizes that, if it goes unchecked, climate change poses long-term risks to the economic viability of its service area and is working with local government agencies and civic organizations to enhance the region’s adaptive capacity.
- Travelers, a major property insurance company, is exploring new pricing strategies to encourage adaptive actions from its commercial and personal customers. It is also working with a range of stakeholders to help better integrate climate change science into catastrophe modeling and loss estimates.
- Mining giant Rio Tinto is using high-resolution climate modeling to conduct detailed site assessments and gauge risks to high-priority assets. Extreme flooding and prolonged drought have emerged as the greatest sources of concern, creating additional justification for the development of a strong water strategy.
Not every business will need to take action to adapt to the physical impacts of climate change, but all firms should be aware of the potential risks. An initial screening can often be conducted relatively easily using publicly available information on climate trends and projections. This screening helps companies determine whether more focused action is needed. It can also help firms uncover hidden opportunities that a changing climate may hold. The companies that take early action on adaptation may gain a competitive advantage over industry peers that stand idle as the physical effects of climate change creep up and surprise them — and their bottom line.