Unaccounted for Risk: How Climate Change Affects Your Bottom Line and What to Do About It

Accounting for Risk

Sound business practice and fiduciary responsibility require that risks to a business are estimated and taken into account either through insurance or through measures to prevent or reduce losses. For example, the risk of fire is reduced by good safety practices, such as proper storage and handling of volatile chemicals; code-compliant electrical wiring; and, pruning vegetation away from structures and power lines. Fire alarms, sprinkler systems and fire hydrants reduce harm to people and property if a fire does break out. In addition, companies purchase fire insurance to cover any catastrophic loss that preventative measures cannot eliminate. A bank will not provide a mortgage to a structure that is uninsured and not up to code.

The consequences of climate change caused by human combustion of fossil fuels, agricultural practices, forest fires and other sources lead to new types of risk that many businesses have not yet taken into account.

Mitigation

Many businesses have worked to reduce their green house gas (GHG) emissions by installing energy management systems and efficient HVAC systems, motors, lighting and appliances. Some companies are upgrading their fleets to low or zero emissions vehicles and encouraging alternative commutes for their employees. Many are switching to renewable energy. While these measures help reduce GHG emissions and future climate disruption, there are already significant changes coming from current and past emissions. In fact, there is a delay of about 40 years from when GHG’s are emitted and when consequences from warming oceans and land occur.[1] So today’s rising seas, temperatures and severe storms are caused by 1970’s emissions. We can expect increasingly devastating effects going forward, even as we take strong action to reduce GHG emissions. 
[1] http://www.skepticalscience.com/Climate-Change-The-40-Year-Delay-Between-Cause-and-Effect.html

Solar on the roof of Google offices in Mountain View, CA. Google is committed to 100% renewable energy for its offices and data centers, a multi-billion dollar commitment. https://www.google.com/green/energy/

Adaptation and Resiliency

Even if we were to eliminate GHG emissions from all sources and if we were to draw down CO2 from the atmosphere at a significant rate, we will still see worsening climate impacts in the decades to come. While rapid transition away from fossil fuels to energy efficiency and cleaner sources of energy is imperative, smart business leaders will recognize the importance of also protecting their assets, supply chains and customers from the worst impacts of climate disruption. The United States military recognizes the threat of climate change, as stated in the 2014 Quadrennial Defense Review:

Climate change poses another significant challenge for the United States and the world at large. As greenhouse gas emissions increase, sea levels are rising, average global temperatures are increasing, and severe weather patterns are accelerating. These changes, coupled with other global dynamics, including growing, urbanizing, more affluent populations, and substantial economic growth in India, China, Brazil, and other nations, will devastate homes, land, and infrastructure. Climate change may exacerbate water scarcity and lead to sharp increases in food costs. The pressures caused by climate change will influence resource competition while placing additional burdens on economies, societies, and governance institutions around the world. These effects are threat multipliers that will aggravate stressors abroad such as poverty, environmental degradation, political instability, and social tensions – conditions that can enable terrorist activity and other forms of violence.[1]

Which of these threats will impact your operations, your supply chain, your customers or the markets into which you sell? What can you do to minimize harm? What opportunities and advantages are available to leaders who recognize the risks and take action?

Market Failure

Markets for commodities and demand for your products and services assume normal weather patterns. Climate change is disrupting these patterns. For example, forests are increasingly stressed by drought, beetle infestations that are not controlled by warm winter weather, extreme winds and wildfires. This will affect the cost and availability of wood products. Water quality and quantity will impair processing and production in many industries including paper, agriculture, energy, food and industrial products. Higher costs of inputs will price many products out of reach of average consumers.

A stressed forest in the southwestern United States. Credit: Leander Anderegg

[1] Chapter 1, Future Security Environment, Page 8

http://archive.defense.gov/pubs/2014_Quadrennial_Defense_Review.pdf

Vulnerability Analysis

A systematic review of the risks to your business can reveal opportunities to prevent losses, to position your operations to be more resilient to climate impacts and to help your customers and suppliers continue to operate despite severe weather, water shortages, sea level rise or other threats. Your company may already be taking measures to be more sustainable and also more resilient to storms and other threats. Actions that build resilience can also enhance your company’s environmental sustainability, reducing waste and improving bottom-line performance.

Minerva's Climate Adaptation Model

A number of services provide risk analysis using global climate change models and can predict likely impacts to your operations around the world. The next step would be to prioritize opportunities for prevention and resilience. There may be resources from governmental sources or other industrial partners to protect critical infrastructure such as utilities, roads, bridges and ports.

Recovery for Resilience

When storms, fires or droughts impose catastrophic losses on businesses and communities, there is the opportunity to rebuild with more resilience for the future. One example is Greensberg, Kansas which rebuilt green after a devastating tornado in 2007.[1]

According to Kiowa County Memorial administrator Mary Sweet, “The tornado not only destroyed our community and hospital—it caused a major shift in how we make decisions. In rebuilding, we learned not to look at the initial cost only, but to look at environmental impact, long-term cost savings, and sustainable and renewable resources.” In 2011, Kiowa County Memorial became the first U.S. hospital to operate with 100 percent renewable (carbon neutral) energy, and in 2012 it became the first hospital to use captured rainwater to flush toilets. This advanced water conservation strategy requires separate water-supply plumbing for toilets. Because tornados can destroy municipal infrastructure, Kiowa County Memorial also has a second, independent well-water service.[2]

The UN Global Assessment Report on Disaster Risk Reduction 2015 says:

Extreme weather events can have direct and indirect impacts on a business. They can lead to downtime, loss of production, jobs and reduced profits. Businesses should understand the climate vulnerabilities of their assets, operations and services, and should be able to translate these in to potential costs. They should have controls, procedures and strategies in place to respond to extreme climatic events. In addition, businesses should be aware of assets, supply chains, services and market conditions that sit outside of their control but which could be impacted by climate change (i.e., external failures). They should address these potential failures through policy, advocacy and procurement practices.

Economic losses from disasters such as earthquakes, tsunamis, cyclones and flooding are now reaching an average of US$250 billion to US$300 billion each year. Future losses (expected annual losses) are now estimated at US$314 billion in the built environment alone. This is the amount that countries should set aside each year to cover future disaster losses.

 As the economy becomes more global, investment tends to flow to locations that offer comparative advantages, including low labour costs, access to export markets, infrastructure and stability. Investment decisions rarely take into account the level of hazard in those locations, and opportunities for short-term profits continue to outweigh concerns about future sustainability. As a consequence, large volumes of capital continue to flow into hazard-prone areas, leading to significant increases in the value of exposed economic assets. 

The continuous mispricing of risk means that consequences are rarely attributed to the decisions that generate the risks. This lack of attribution and accountability creates perverse incentives for continued risk-generating behaviour, as those who gain from risk rarely bear the costs. As such, new risks have been generated and accumulated faster than existing risks have been reduced. [3]

Minerva advises our corporate and governmental clients on evaluating and addressing the risks they face from climate change impacts, such as heat, floods, extreme storms, drought, subsidence, water scarcity and sea level rise.  What impacts are already affecting your enterprise or community? What changes are likely to occur and what can you do to build resilience in your operations, your supply chains and with your customers and community members? Sound business practice means taking real risks into account and taking decisive action to turn potential losses into profitable advantage.

[1] http://www.usatoday.com/story/news/greenhouse/2013/04/13/greensburg-kansas/2078901/

[2] https://toolkit.climate.gov/case-studies/following-devastating-tornado-town-and-hospital-rebuild-harness-wind-energy

[3] UN Global Assessment Report on Disaster Risk Reduction 2015

http://www.preventionweb.net/english/hyogo/gar/2015/en/gar-pdf/GAR2015_EN.pdf