It is quite clear that climate change is a real and present
concern; one that is affecting our climate is clearly adverse ways. Looking
back on the past 5 years, there have been a myriad of natural disasters in the
form of hurricanes, droughts, and floods. In addition to the regrettable
widespread impact on human life, the untold damage climate change is having on
organisations is extremely detrimental to the way businesses operate.
Damage and Insurance
The National Oceanic and Atmospheric Administration
reportedly calculated 11 extreme weather events that wrought more than 1
billion dollars in losses [1] in
2012.
Insurance companies for example are already feeling the
effects of climate change. The billions wrought in damage is costly and may
make some areas uninsurable [2] where the unpredictability of the environment is adversely altering the risk
assessments insurance companies undertake [3].
“In some high-risk
areas, ocean warming and climate change threaten the insurability of catastrophe
risk more generally… To avoid market failure, the coupling of risk transfer and
risk mitigation becomes essential.” – Warming Of the Oceans and
Implications for the (Re) Insurance Industry: Geneva Association [4].
Wildfires, last year laid waste to 10 million acres across
the US mainland; Typhoon Bopha struck the Philippines destroying more than
300,000 homes, and extreme drought left over 1,000 towns in Brazil short of
water leading to food shortages – due to livestock perishing – and growing
tensions due to scarcity of water. Situation such as the latter in Brazil are a
stark pointer to a world in which climate risks issue restriction on the
resources which we take for granted.
Business Implications
In a business context, climate change has the potential to
disrupt operations, devastating sections of the supply chain, or at least
reducing access. These impacts have costs; costs which businesses cannot afford
to ignore. It has been reported that climate change costs organisations between
1% and 5% depending on whether quick and decisive action is taken by
policymakers, or not. Further, the impact of climate change has been suggested
to double every 14 years according to a sectoral analysis covering 11 sectors
such as oil & gas, food producers, and airlines, performed by TruCost [5].
In light of these alarming revelations, climate change –
relative to a few years ago – is becoming a key risk issue. Investor
communities for example, are increasingly concerned about the [financial]
constraints of a world in which water becomes a scarce commodity; energy
becomes so expensive, it diminishes organisational value; among others. Further,
a survey completed by Ernst&Young in collaboration with GreenBiz Group
titled, Six Growing Trends in Corporate Sustainability showed that shareholders
are increasingly enquiring about the efforts a company is taking to reduce it
energy consumption, its greenhouse gas reduction efforts, and how the company
is responding to Corporate Reporting.
“Climate change should
be amongst the top considerations companies will need to take into account when
making long-term capital investment decisions.” – David Batchelor, CEO of
risk management firm, Marsh.
Sustainability is an issue which organisations will have to
keep in mind in future, if they are not doing so already as in future, it
likely will become a potent threat to the health and vitality of business. On
key way to do this is to access the business areas of an organisation, analyse
all the products and services provided, and determine their exposure to climate
change. Ask yourself what the worst case scenario is, and whether the
organisation is prepared for it. It also makes sense to analyse products and
services which are considered low net worth relative to high earning services
and products as even they can be profoundly sensitive to supply chain shocks –
a prime example is that of palm oil, and sustainability issues surrounding the
widely used oil.
This is more commonly known as a Scenario Analysis and is a
means of risk management. In this context, each product or service is analysed
on its susceptibility to water scarcity, pressure on agriculture and potential
risk, and excess deforestation to name a few. Assess where there are key
vulnerabilities in the supply chain, and work within the organisation to
address how these issues can be alleviated.
Conclusion
Climate change is a serious issue of our time. Whilst it
presents risks, it also presents opportunities for business, organisations etc.
to capitalise upon. By managing these risks, the resilience of the business
entity can be fortified through securing (or at least exercising damage
limitation on) supply chains, and as such enhance organisational value.
Managing these risks will almost certainly positively impact on business value
and share prices, and additionally create value for stakeholders as a whole.
(For example, using more renewable energy reduces the associated externalities
associated with oil and gas such as air pollution and local pollution which
preserves natural capital – something good for the planet as a whole.) Further
in managing these organisational risks, it can present opportunities – business
and otherwise – and lead to innovation. The benefits that result in managing
climate risks are yours for the taking.
[1]
State of Green Business 2013 – Joel Makower and Associates (2013)
[2]
http://au.ibtimes.com/articles/484241/20130628/parts-world-increasingly-uninsurable-due-climate-change.htm#.UdGiGz7h5oY
[3]
http://blueandgreentomorrow.com/2013/06/25/climate-change-is-making-parts-of-the-world-uninsurable/
[4]
https://www.genevaassociation.org/media/616661/GA2013-Warming_of_the_Oceans.pdf
[5]
KPMG (2012). Expect the Unexpected: Building business value in a changing world
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