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Environment & Energy Report

INSIGHT: Initiating a Solid Climate Risk Management Process

Nov. 18, 2019, 9:01 AM

Climate change will increasingly impact business as usual—increasing costs, disrupting revenues, impacting the people that work for you, buy from you, and live near you.

How well do you understand the physical, economic and social risks that climate change poses for your business? How well positioned are you to mitigate those risks, and even to leverage your response to create a stronger commercial position than you occupy today?

Getting started is simple. You don’t need complex climate models to initiate a solid climate risk management process.

Start by recognizing that climate change risk (and opportunity) falls into two categories:

  1. the risks of physical climate change, and
  2. the risks caused by the economic transition to a low carbon economy.

Each category creates environmental, financial,and social challenges. Physical climate change risks include flooding, drought and other impacts wrought by changes in temperature, precipitation and sea level rise. Risks caused by the transition to a low carbon economy are policy, technology, legal, and market changes driven by the need to reduce greenhouse gas (aka carbon) emissions and slow the progress of climate change.

Cataloging Risks

To get started in understanding your risks, catalog which aspects of your business—operations, facilities, suppliers, distribution, and customers—would be impacted by these risks should they occur.

Nope, not suggesting you start with a colorful map of how climate change may be spreading across the globe. Start by determining what kind of impact would present a challenge or opportunity to your business and where. Then you can turn to models and published studies to see how likely those impacts, the ones that you already know are priorities, are to occur.

Simply put, start with the end in mind.

Take for example physical climate risk. As you sort through possible physical climate risks you may catalog flooding, temperature, and precipitation impacts on crops, and increased HVAC costs as areas that could be impactful to the business should they occur. For flood risk then you might first identify where you or important suppliers have critical coastal operations or operations within inland 100-year flood plains. For crops, you might first prioritize key crops based on revenue or limitation of sources.

Then identify the climate related constraints that affect germination, yield, and quality for those priority crops. Only then do you turn to modeling to see if the parameters of interest are projected to change for your crops of interest.

Consider for example that high nighttime temperatures impact corn yield. If your risk assessment exercise had begun with a map of projected increases in mean daily temperatures, the information needed would have been obscured.

Economic Transition

Take the same approach in evaluating your vulnerabilities due to the economic transition to a low carbon economy. Consider the possible risks presented by policy, technology, legal, and market changes BEFORE delving into complex models of likelihood.

Examples of these changes include policies to put a cost on GHG emissions, requirements for utilities to increase use of renewable energy, technologies to improve energy efficiency, legal challenges for not acting to mitigate climate change, and customers seeking products to lower their own GHG emissions.

Corporate leaders on climate change recognize the importance of taking action to reduce GHG emissions. The key here is to recognize where your most impactful contribution lies, and not to be distracted by ancillary risks and opportunities.

Take a company with a modest electricity bill as a cost of goods produced, that also is a hefty user of HFC refrigerants. For this company, further analysis of technologies and regulations trending away from HFCs and toward low global warming potential (GWP) refrigerants is a far greater priority than modeling how electricity costs may change with increased adoption of renewable energy technologies.

Too many companies treat climate change like a mystical puzzle, too complicated, unclear and uncertain to pull into a meaningful strategy.

But we deal with climate daily. We know that increases in heating degree days means more cooling-related energy costs. We have contingency plans in place for flood events at our coastal operations. We have supply chains optimized to protect supply and cost in the face of variability in crop production.

And similarly, we deal with policy, technology, legal and market changes routinely. Incorporating climate change into the enterprise risk management strategy begins with a surprisingly straightforward exercise: Where do we already know climate matters to our business, and under what change scenario would our existing planning require revision?

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Lisa Grice is the executive director at Anthesis Group, a specialist provider of sustainability and environmental consulting, technology, and program management services. She is globally known for engaging CEOs and senior teams to drive game-changing sustainability performance that delivers brand equity, operational efficiency, and stakeholder value.