Scenario Planning for Climate Change

A Guide for Strategists

Nardia Haigh

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351016339
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Winner of the 2020 Book Award for the Organizations and the Natural Environment (ONE) Division of the Academy of Management.

Climate change, and the resultant impact on resource management and societal wellbeing, is one of the greatest challenges facing businesses and their long-term performance. Uncertainty about access to resources, unanticipated weather events, rapidly changing market conditions and potential social unrest is felt across all business and industry sectors. This book sets out an engaging step-by-step scenario-planning method that executives, Board members, managers and consultants can follow to develop a long-term strategy for climate change tailored for their business.

Most climate change strategy books discuss climate mitigation only, focusing on how companies engage with carbon policy, new technologies, markets and other stakeholders about reducing carbon emissions. This book explores these themes but also looks at strategizing for climate change adaptation. Adaptation is equally important, especially given that companies cannot negotiate with nature. There is a need to interpret climate science for business in a way that acknowledges the realities of climate change and identifies a way forwards in responding to this uncertain future.

1

LIMITATIONS OF TRADITIONAL STRATEGIZING AND STRENGTHS OF SCENARIO PLANNING FOR CLIMATE CHANGE

Many companies find themselves dissatisfied with their ability to strategize, because few strategizing techniques are adequate for today’s continuously evolving and increasingly turbulent environment. In fact, annual strategic planning processes have been widely panned as ineffective since the 1980s,¹ and more recently Pierre Wack likened the strategic planning process to a “corporate rain dance,” where it is performed but often has no influence on subsequent events.² Attempts to apply traditional strategizing techniques to climate change and its long-term implications is likely to exacerbate these existing frustrations. Below is a review of the key limitations of rationalist, probabilistic, single-future approaches to strategizing for climate change, and how complementing scenario planning with traditional strategizing can address those limitations.

Limitations of traditional strategizing

Short time horizons

Traditional strategic planning processes typically produce strategic plans with a rolling five-year time horizon. This time horizon may be longer in some sectors, such as forestry, where strategic plans project decades into the future to account for the production cycle of its product; however, five years is considered a norm among many organizations. These shorter five-year strategic plans are important for giving decision-makers a view of what may emerge during their tenure. A five-year strategic plan makes sense when the most popular term of a CEO contract is three or five years.³ However, a five-year time horizon limits longer-term strategizing that is in the interests of organizational longevity, because it focuses on known trends and competition,² and because most significant organizational investments, assets, opportunities, and challenges will outlive it. Many of the challenges and opportunities relating to climate change will also outlive a five-year time horizon.

Scenario planning methods are developed specifically for longer-term strategizing, into which five-year strategic plans should be positioned. Scenario planning helps decision-makers appreciate that long-term decisions are important, and that they are qualitatively different from shorter-term decisions.² The appropriate scenario planning time horizon for your organization may be shorter or longer relative to others, but it will typically be longer than a traditional five-year strategic plan, since the purpose of scenario planning is to consider what may be over the horizon. In this book, I focus on a 25-year time horizon. Other time horizons can also be accommodated, but a 25-year time horizon will push your thinking beyond a traditional five-year strategic plan, and is just long enough for the current state of climate science to support your research. Chapter 1 covers what to consider as you determine the best time horizon for your organization.

A single view of the future that avoids uncertainty

Traditional approaches to strategizing often adopt a rational, probabilistic approach that envisions a single (usually desired) future, and develops a strategy to create and then operate successfully within it. Traditional strategies are, after all, driven significantly by the vision of leaders developing them, and leaders are rewarded for being visionary. Real options planning is also a single-view approach, because even though it produces multiple strategic options, they tend to circle around a single potential future.⁴ Likewise, risk management is a single-view approach, because it produces a list of more or less probable and impactful risks to which the single view of the future may be exposed.

The problem is that single-view approaches essentially gamble on a single vision of the future actually emerging. As Woody Wade mentioned in his book, Scenario Planning: A Field Guide to the Future, “there is no such thing as the future.”⁵ Focusing on a single view of the future creates what Paul Schoemaker at the University of Pennsylvania has called “tunnel vision”⁶ by making you blind to other possibilities. What if that single desired future doesn’t emerge? Given the dynamic nature of the strategic landscape, coupled with the uncertainty that climate change brings, it seems increasingly unlikely that any single view of the future would emerge. As Pierre Wack⁷ stated,

… sooner or later forecasts will fail when they are needed most: in anticipating major shifts in the business environment that make whole strategies obsolete.

Coupled with relying on a single view of the future, forecasting is often based on previous rates of change and past performance. Even though we live in times where turbulence and rapid change occur regularly, traditional approaches to strategizing often don’t consider that rates of change might change.⁶ Steady rates of change often only exist in theory, while reality tends to follow uneven rates of change and even punctuated equilibria. The rate of adoption of renewable energy technologies, such as solar photovoltaic (PV) technologies provides an example: The adoption of solar PV technologies can be boosted or interrupted by myriad variables, such as the availability of investment dollars to fund development and commercialization, the implementation or repeal of government subsidies and other incentives, the wholesale price of electricity they produce relative to other renewable and fossil fuel technologies, the emergence of new competing technologies (other renewables), the emergence of new complementary technologies (like battery technologies), changes in market preference for renewable energy, changes in supply from existing technologies, and other variables, all suggesting it is unrealistic to expect a predictable rate of adoption.

Increasing the accuracy of forecasts or rates of change will not improve rational, probabilistic strategizing, because it still relies on a single view of the future. Planning for a single future can only work when all aspects of that future are known and are certain to happen, which is rarely the case. As the above solar PV example illustrates, probabilistic approaches to strategizing are not appropriate amid the uncertainty of today’s world, because our economic, social, environmental, and technological systems are too interdependent, too complex, and too uncertain to gamble on a single future.

By helping decision-makers focus on plausibility rather than probability, and “expecting and examining uncertainty as normal”⁴ scenario planning produces more effective strategizing. The word “plausible” in scenario planning is a carefully chosen one that avoids probabilistic predictions and normative declarations, and rather just looks at what could happen.²

People often ask whether, in economic terms, scenario planning aims to identify possible “black swan events.” Black swan events are rare but highly consequential,⁵ and therefore usually surprising events that are difficult to predict, because they are outside the realm of normal planning processes. Black swan events are usually negative (e.g. 9/11 attack on the U.S., or the Fukushima disaster in Japan), but can also be positive (e.g. the recent accidental discovery of plastic-eating bacteria, or years ago the discovery of penicillin). By undertaking scenario planning, you will be trying to identify a range of metaphorical swans, some of which may be black, in that it’s not a method just to identify impactful events that are difficult to predict, but rather a range of plausible impactful events and event combinations. Scenarios will usually include a range of possible outcomes, each of which may be positive or negative, surprising or predictable, sudden or incremental, and be of large or small magnitude, and will facilitate your preparation for whatever unfolds.

By undertaking scenario planning, you overcome the single future problem through a process of identifying driving forces that will shape your organization’s future, and developing multiple plausible scenarios based on different combinations of those forces. Scenario planning helps decision-makers prepare for “futures that might happen, rather than the future they would like to create.”² By understanding how underlying forces beyond your control can shape the future, you can construct multiple scenarios, and develop flexible strategies to prepare for whatever unfolds.

Optimism bias

Another limitation of traditional strategizing is that it is fed by optimism bias. Optimism bias,⁸ also known as unrealistic optimism⁹ or overconfidence,⁶, ¹⁰ is a deep-rooted and pervasive cognitive bias affecting most people. Cognitive neuroscientist Tali Sharot defines optimism bias as a “cognitive illusion” where we tend to “overestimate our likelihood of experiencing good events and underestimate the likelihood of experiencing bad events” relative to actual probabilities of them being experienced by the average person or society as a whole.¹¹ Sharot found that those parts of the brain which monitor emotional salience – the amygdala and rostral anterior cingulate cortex – become more highly activated when people imagine positive future events and are less activated when they imagine negative future events;⁸ leading us to see the world through rose-tinted glasses. We each assume that we possess unique capabilities that will ensure things turn out for the good, and use this belief to furnish the details of an uncertain future.¹²

The implication of optimism bias is that we don’t give enough weight to the possibility of negative outcomes, especially when there are considerable potential benefits in the good outcomes.¹³ This relates to the single view problem: Focusing on one desired future prevents us from taking precautionary action to avoid or adequately limit our exposure to other possible (or even probable) less appealing futures. In business settings, research has found that optimism bias manifests as projects over-running their anticipated time, cost, and scope,¹⁴ inability to kill failing projects,¹⁵ inaccurate projections of organizational performance,¹⁰ and markets and investments not performing as well as anticipated.¹⁶, ¹⁷ Joan Costa-Font and his colleagues at the London School of Economics found optimism bias present in relation to climate change.¹³ True to form, Costa-Font found that people perceived that climate change would affect society as a whole more than it would affect them personally.

In her 2012 TED Talk, Tali Sharot said that to manage optimism bias “we need to be able to imagine a different reality, and then we need to believe that that reality is possible.”¹¹ Scenario planning helps to manage optimism bias in several ways. It facilitates the identification of real forces that are driving plausible long-term futures, some of which will be uncomfortable to consider, and others that will be pleasant. It also weights each scenario equally, so that one “preferred future” scenario cannot be chosen over others.

However, being aware of optimism bias does not address it, and while scenario planning helps to manage it, optimism bias also needs to be managed within the scenario planning process. For instance, research at the University of Pennsylvania found that optimism bias can affect scenario planning.⁶ Nearly 60 MBA students were asked to develop positive and negative scenarios for the industry in which they expected to work after graduation. Students scored each underlying trend driving their scenarios according to whether it was positive, negative, or indeterminate, and identified only 1.48 negative trends to every 2 positive trends – they believed positive outcomes were more probable than negative outcomes. To manage op...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• Acknowledgments
• A note to the reader
• Introduction
• 1. Limitations of traditional strategizing and strengths of scenario planning for climate change
• 2. Step 1: Set the agenda, focal question, and time horizon, and identify key stakeholders
• 3. Step 2: Identify, specify, and rank the driving forces
• 4. Step 3: Develop the scenarios
• 5. Step 4: Identify warning signals, strategize, and assess
• Conclusion
• Climate driver summaries
• Index