Planning and Preparing for the Bumpy Road Ahead
[Bob Leonard is one of the most knowledgeable people I know about the stark realities of the climate crisis. He is a leader in the new business of advising companies on how best to mitigate the business risks of this crisis. Too many companies today think that climate is about having a robust ESG department and not fully to anticipate how, when and where the company may be at high financial and operational risk. The Institute has long held the position that humanity must act with extreme urgency if we want our children and grandchildren to be able to live in some semblance of a civilization. CEOs take note of Bob’s message. David Houle]
Environment, Social and Governance (ESG) reporting and reducing carbon footprints are just the first steps in what is going to be a decades long initiative to mitigate and adapt to our climate crisis. Every business and every person will be impacted, and those impacts will continue for a long, long time.
When I meet with business leaders, they have self-selected to come to me. They have moved past climate denial (as they should, it is literally undeniable at this point), so they know they need to manage the climate impacts their companies are vulnerable to. But they don’t know what those impacts will be. And they don’t know how to prioritize the risks. They are seeking help to ensure enduring success in a rapidly transforming business environment. It’s not only our climate crisis that is causing the volatility and uncertainty, but a myriad of concurrent trends in our society, technology, economy, environment and politics (STEEP). Steep, indeed!
A recent PwC CEO Survey of over 4,000 business leaders revealed that even though many CEOs are setting goals to reach net zero emissions, they don’t perceive serious threats to their business operations from climate impacts. They view climate as a compliance issue rather than one that is remaking the business environment and may strike at the heart of their business models. The vast majority of companies are woefully unprepared for the scope and scale of climate-linked disruptions to their businesses… even as the threats, risks and impacts are growing.
A company could reduce its emissions to zero and still be blindsided by climate-related risks: supply chain disruptions due to a major cyclone, increasing cost of capital due to products ill-suited for a zero carbon future, customer attrition as a reaction to a perception of greenwashing, or a disruption from competitors who have developed innovative climate solutions.
All sorts of STEEP trends (driven by the mother of all risks – our climate crisis) are forcing an end to fossil fuel use. Both climate and the burning of fossil fuels touch every part of our lives. A global sea change in how we live is required. Changes in lifestyle, business models, company cultures and organizational structures will go very far beyond recycling, carbon offsets and PR campaigns. Everything needs to be redesigned and reinvented. Those who think long-term, and choose to lead, may experience a brief period of competitive disadvantage. But those who do not take climate threats, risks and opportunities seriously will end up like Kodak, Blockbuster and Borders Books.
Many companies are blind to the critical, often surprising, array of climate risks they face. Researching, assessing, strategizing and planning for them can not only manage the risks but unearth the business opportunities in an environment and a society experiencing rapid transformation.
Too few businesses are examining their vulnerabilities to physical and transitional risks caused by our climate crisis, and to the fact that these risks will only grow in the years and decades ahead. Here’s just a small sample of business disruptions due to climate impacts:
- Ski areas in the Rockies have had to adapt due to a drought that drops less snow on the slopes, and increasing temperatures that cause that snow to melt. A ski resort in Oregon has installed zip lines and a disk golf course to make up for lost winter revenues in the summers.
- After a storm surge in Florida caused water damage to a warehouse thousands of feet from the Gulf, a Property and Casualty insurer revamped their actuarial and underwriting guidelines. Importantly, they also trained their actuaries, underwriters and field claims adjusters in climate science and climate risk management.
- An industrial equipment maker was experiencing higher than normal failure rates in areas where extreme heat events were occurring more frequently. They traced the failure to a component that was being purchased from a Chinese supplier. They did not renew a contract for the component and designed a more heat resilient replacement. They now manufacture that component inhouse (at a lower cost) using a 3D printer.
Some organizations (mostly large corporations) are assessing their climate risks and using those assessments to develop a more robust and effective climate strategy, one that helps mitigate risks and spot opportunities,
Leaders know about the looming physical dangers of climate change in a general sense. The World Economic Forum’s Global Risks Report 2022 (which tracks the risk perceptions of global leaders in business, government and civil society) found that “extreme weather” is considered the most critical threat today. Yet few have an understanding of the specific impacts that our climate crisis will have on their businesses.
The risks are present whether leaders are aware of them or not. For some companies, extreme weather events and other climate-related physical impacts are already being felt. It’s a dereliction of duty for those leaders to ignore the probabilities of more frequent and severe impacts in the future.
There are many other types of risks (more nuanced, or not immediately identifiable as climate-related) that organizations must work to define. These risks (and unexplored potential business opportunities) have implications for a business environment that is becoming more transparent and held to account. These risks and opportunities are financially material to shareholders and employees… and ultimately will be part of a board’s fiduciary duty to manage.
Physical Risks – severe weather events will impact not only a company’s infrastructure, but the surrounding public infrastructure. What happens when turning on the tap doesn’t produce the water needed for a manufacturing process? What happens when power from the grid ceases, and lighting and office equipment are no longer operable for extended periods of time?
Policy Risks – governmental agencies will be forced to mandate climate mitigation actions. What happens when the costs of compliance grow substantially beyond the budget set aside for mandated actions?
Market Risks – stakeholders (including customers, shareholders, employees and local communities) will demand low carbon processes and products. What happens when sourced components are no longer fit for purpose? Or when investors move their money to competitors with better environmental practices? Or when employees leave for companies that are including climate risks and opportunities in their strategic plans?
The direct operational impact of a climate-related weather disaster often reaches far beyond physical damages, and can include interruptions in business continuity. What happens when employees have lost their homes to fire or flood? Does the organization have a plan in place for that? It used to be so infrequent an occurrence, that it could be discounted. Depending on location, that may no longer be the case.
To understand these and other climate-related risks, leaders (really everybody in an organization) need a basic knowledge of climate science. Climate literacy will help everyone in an organization to not only understand what should be done, but why. Climate can furnish a purpose during an era when people are seeking meaning in their work.
I am often shocked to learn how little business leaders know about climate science. For instance, I haven’t met one who understands that CO2 accumulates in the atmosphere… that every molecule of CO2 adds to the amount currently resident in our air, and it will be there for a century unless we take action to draw it down. This is basic physics, and it guarantees continued warming for decades. Below is a chart that shows this accumulation of “resident CO2” from 1700 to 2010. It is now estimated that the number of gigatons is up from 1230 in 2010 to over 1400 in 2022
Climate risk scenarios examine the impacts associated with differing levels of mitigation responses taken on a global scale. They typically describe three potential futures:
- Business as usual – no meaningful reduction in emissions or drawdowns
- Most probable – moderate reduction in emissions and small amount of drawdown
- Best case – a near complete reduction in emissions and full scale natural and technological drawdown.
These scenarios span decades into the future and are used to project the frequency and severity of weather events in different locations around the world. Business leaders can then examine how their vulnerabilities change over time. This helps address questions such as:
- What threats does my organization need to prepare for, today and in the future?
- Which are most likely to happen? Which will have the most negative impact? Which can be safely ignored?
- What mitigation strategies should I apply? How much are they going to cost?
- What potential alternative actions could we take?
Climate risk assessment can help leaders uncover, and prioritize, opportunities to thrive in a world made volatile and uncertain by our climate crisis. That’s encouraging due to how urgent our climate crisis is. With further warming already “baked in” under any decarbonization scenario, the time for companies to get deadly serious about the real business risks they face was… yesterday. At the same time, the critical importance of curbing emissions, to mitigate even more severe climate impacts, makes decarbonization and business model reinvention mission-critical today. Businesses need to do both.
Seriously addressing climate risks is a catalyst for driving the conversation inside an organization. It aids in setting priorities and allocating resources. The good news is that tools for climate modeling and scenario analysis are becoming more sophisticated and affordable, enabling a wider swath of organizations (include SMEs) to understand their risks and take appropriate action.
An ounce of prevention is worth a pound of cure. Organizations that tackle this issue now, allocate the resources needed, and build a long-term strategic plan will have more choices going forward. They will have the flexibility and adaptability that will allow them to thrive.
Nature bats last. We can’t bend her to our will. What we can (and must) do is understand her better, learn how to co-exist with her, and make the necessary changes and adaptations sooner rather than later.
Bob Leonard is the Managing Consultant at Climate Foresight Advisory which offers a Climate Planning service using Strategic Foresight, Scenario Planning and Climate Risk Management using Strategic Foresight, Scenario Planning and Climate Risk Management tools and methodologies. These plans help mid-sized businesses prepare for the specific climate impacts they are vulnerable to, and to find climate-related business opportunities. Each business has intellectual property, in house skills, products and services that may be repurposed or built upon to deliver climate solutions.