A Short Guide to Climate Change Risk

Nigel Arnell

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351961875
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

Climate change poses a risk to business operations and to markets, and a poor business response to this risk can lead to reputational damage, or worse. At the same time, climate change can bring opportunities for some businesses. In this addition to Gower's series of Short Guides to Business Risk, Professor Arnell, one of the world's leading experts in the field, reviews this critical area of risk posed to businesses and other organisations by climate change and considers how they can respond to this threat. A Short Guide to Climate Change Risk focuses on the impacts and consequences of climate change rather than on business use of energy or business and 'sustainability' issues. The author examines the advantages and disadvantages of different approaches to addressing these risks, with international case study examples. With chapters on the nature, science and politics of climate change, on the assessment and management of climate change risks, and recommendations for incorporating climate change risks into a Company Risk Management System, this concise guide serves the needs of business students and practitioners across a wide range of sectors, public and private.

1 Climate Change as a Business Risk

INTRODUCTION: WHAT IS CLIMATE CHANGE?

Over the last few years the phrase ‘climate change’ has hardly been out of the media. A succession of extreme weather events around the world – including tropical Storm Sandy causing widespread damage in new York in 2012, typhoon haiyan hitting the Philippines in 2013 and several bouts of extreme wet and hot weather in Europe – have illustrated how vulnerable both developed and developing economies are to extreme weather. Politicians have devoted time and effort to try to negotiate an international climate change treaty. Campaign groups urge them to do more to avert major catastrophe, but others suggest that the threats posed by climate change are overstated. Governments have tried several – controversial – ways of encouraging us to use energy more efficiently and to increase the use of renewable energy sources. Increasingly, climate change is becoming relevant for many organisations in both the private and public sectors. It affects both how they use energy and its price, it affects the risks to which an organisation is exposed, and can also open up new opportunities.

The most recent reports of the United Nations Intergovernmental Panel on Climate Change (IPCC) were released in late 2013¹ and early 2014.^{2, 3} their headline conclusions were:

• Warming of the climate system is unequivocal, and each of the last three decades has been successively warmer than any decade since 1850.
• Carbon dioxide concentrations in the atmosphere have increased by 40% since pre-industrial times, and about half of cumulative human CO₂ emissions since 1750 have occurred in the last 40 years.
• It is extremely likely that this human influence has been the dominant cause of the observed warming since the mid 20^th century.
• Continued emissions of greenhouse gases will cause further warming and changes in the climate system. Without increased efforts to reduce emissions, global mean surface temperature will be 2.5-7.8°C above pre-industrial levels by 2100.
• Climate change increases risks from extreme events (such as storms, floods, heatwaves and droughts), but these risks vary from place to place.

• Limiting climate change will require substantial and sustained reductions of greenhouse gas emissions. This will reduce the overall risks of climate change impacts.
• Responding to climate-related risks involves decision-making in a changing world, with continuing uncertainty about the severity and timing of climate change impacts and with limits to the effectiveness of adaptation.

The aim of this book is to explain the science behind climate change, to discuss the potential impacts, and to describe ways of addressing the risks and opportunities posed by climate change. It seeks to provide answers to questions such as:

• Can we really see any effects of climate change?
• Can we be confident that the climate will change in the future?
• What is the difference between weather variability and climate change?
• How might climate change in the future, and how will it affect my organisation?
• How can we adapt to climate change risks and exploit opportunities?

CLIMATE CHANGE AND BUSINESS RISK

The World Economic Forum’s Global Risk 2014 report⁴ surveyed over 700 global business leaders and decision-makers on 31 global risks. Two of the top ten risks directly relate to climate change: the failure of climate change policy came in at number 5, and number 6 was a greater incidence of extreme weather events. Two of the other risks – water crises (at number 3) and food crises (number 8) – are also affected by climate change. In the UK, a survey of the FTSE 350 companies in 2013⁵ showed that 86% of companies had identified potential risks from climate change; 84% had identified risks from regulations, 74% had identified physical risks, and 70% had identified other risks such as taxes and changes in behaviour. The five most commonly reported risks related to tax, regulation and consumer behaviour. 82% of the companies identified potential opportunities from climate change – again these mostly related to regulations, taxes and behaviours and only 59% identified potential opportunities from changes in climate itself. An earlier UK report⁶ found that whilst 73% of large companies were ‘thinking’ about climate change, only 56% of small companies were doing so, and less than a quarter were actually doing something. 34% of the companies surveyed were ‘very concerned’ about the effects of climate change on the UK.

There is therefore some awareness of climate change amongst the business community, but this varies considerably between organisations. The perceptions of the nature of risks also vary, reflecting the many ways in which climate change may affect an organisation. There are five broad areas of risk from climate change:

• Operational: climate change may affect the ability or costs of doing business;
• Supply chains and procurement: climate change may impact upon an organisation’s supply chain;
• Market: changes in climate may alter the demand for an organisation’s product or service;
• Regulatory: changes in climate may lead to new regulations which constrain – or facilitate – an organisation’s activities;
• Reputation: the way an organisation is perceived to be responding to climate change may affect its reputation.

An organisation should therefore consider adding climate change to its risk register.

ADAPT TO IMPACTS AND OPPORTUNITIES, OR REDUCE EMISSIONS?

There are two ways to address the risks posed by climate change. The first is to seek to reduce the amount of climate change that will occur. This could be achieved by slowing or reversing the increase in concentration of greenhouse gases in the atmosphere, which is known as ‘mitigation’ in the language of climate change.⁷ these reductions in concentration could be achieved in several ways. The most obvious is through using less fossil fuel by using less energy, increasing energy efficiency or by the substitution of other sources of energy. Greenhouse gases can also in principle be extracted from waste and stored so that they do not accumulate in the atmosphere; carbon capture and storage (CCS) does this by extracting CO₂ from the effluent from power stations and burying it deep underground. It is also possible to reduce the increase in emissions by slowing the removal of forest cover (deforestation releases carbon into the atmosphere), and to increase the withdrawal of carbon from the atmosphere by planting trees. More controversially, a range of fanciful ‘geoengineering’ approaches have been proposed to extract CO₂ from the atmosphere by fertilising the oceans to absorb more CO₂, or to offset the effects of increasing greenhouse gases by reflecting solar radiation back into space. These face a multitude of practical, conceptual and political challenges, and are highly unlikely to be implemented in practice.

The second approach is to seek to adjust to changing climate risks and take advantage of new opportunities: this is known as ‘adaptation’. Some adaptation will take place autonomously as organisations react to changing stimuli, but much will need to be planned. There are many potential ways of adapting to climate change, as we shall see later. Organisations can adapt specifically to climate change, or can incorporate climate change as just another driver into normal business planning.

In practice, an organisation’s response to climate change is likely to contain elements of both mitigation and adaptation, and there are of course linkages between measures to mitigate climate change and measures to adapt to changing risks. Mitigation and adaptation objectives and measures may in some cases conflict, and in other cases complement each other. For example, a strategy to adapt to warmer temperatures by increasing air conditioning would conflict with a strategy to reduce energy use. On the other hand, it may be possible to design a new building, for example, that both used less energy and was less prone to overheating.

National and international climate change policies have tended to concentrate on mitigation, although they are increasingly concerned with supporting adaptation.

CLIMATE CHANGE AND SUSTAINABILITY

Back in 1987 the World Commission on environment and development (also known as the Brundtland Commission) published ‘our Common Future’,⁸ which introduced the concept of sustainable development:

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Since then, there have been many attempts to implement sustainable development amongst businesses in practice, and many guides have been written⁹ emphasising the commercial benefits of sustainability: these include lower costs and an enhanced ‘licence to operate’. The World Business Council on Sustainable development published a vision for 2050 for a world ‘on the way to sustainability’.¹⁰

The devil is in the detail – and the concept of sustainability is intrinsically ambiguous – but most attempts at implementing sustainable development in an organisation focus on balancing the four capitals: financial, human, social and natural. ‘natural capital’ represents the environmental resources that are used in the production of goods and services, and the environmental resources and qualities that are depleted by their production and use. Overexploitation and pollution of the natural environment deplete natural capital. The key difficulties in implementing sustainable development practices lie in the characterisation and balancing of the four capitals.

Acting ‘sustainably’, however, does not in itself mean that an organisation is addressing climate change. Climate change adds an extra dimension. It influences the availability of natural capital (including through exposure to ...