8 simple rules for grappling with climate risk

Climate change will have a massive impact on how companies and societies operate, but many people are still unaware of the full extent of climate risks. Forum for the Future’s Iain Watt breaks this complex issue down for companies.

plane flooded bangkok
An airplane is partially submerged by floodwaters in Bangkok, Thailand, in 2011. Climate change impacts can cause hundreds of millions of dollars of losses to businesses. Image: Onizu3d / Shutterstock.com

The Committee on Climate Change isn’t the only organisation trying to draw attention to the risks associated with climate change.

Here at Forum for the Future, as we grapple with the gargantuan challenge of limiting global warming to 1.5°C, the need to build greater awareness of the risks (and indeed the opportunities) that climate change poses has become ever more central to our work.

Why? Because, if we are to have a chance of remaining within 1.5°C then we need to mobilise the business community to not only tackle their own emissions, but also to become vocal and effective advocates for widespread societal action on climate change. Yet this will only happen once they really understand the potential risks associated with climate change.

And, make no mistake about it, the risks posed by climate change are huge!

If we cross the 1.5°C or 2°C thresholds, then the resulting geophysical change will put huge stress on the global economy. Alternatively, avoiding 2°C – never mind 1.5°C – will require the rapid and complete transformation of the global energy, transportation and agricultural systems.  

Either way, climate change, and the societal response to climate change, are going to transform the competitive context in which all companies operate. Yet, awareness of climate risk remains worryingly low.

Building understanding

We’re therefore working with our Partners to build understanding of climate risk – and to help them design strategies that protect their business as well as the biosphere.

We’ve found the following diagram to be a useful starting point. It not only illustrates the wide variety of risks that climate change poses (the wedges), but also highlights the fact that these risks do not just apply to corporate assets and operations – but also to supply chains, markets, and the public infrastructure and social cohesion upon which all companies rely (the circles).

Image: Forum for the Future

We need big-picture thinking and action

In our experience, a reluctance to think beyond the direct ‘corporate boundary’ is one of biggest gaps in corporate awareness of climate risk. (Which is why it’s great to see the Committee on Climate Change stress the risks to public infrastructure).

Many companies falsely reassure themselves that they are protected against climate risk, when, in fact, they’ve barely scratched the surface.

To offer a rather blunt example: imagine a business involved in agricultural production at, or below, sea level. They might spend a lot of effort and money protecting their land against sea level rise. Yet, if rising sea levels disrupt the roads and ports upon which they depend, then these investments will have been in vain.

While some pioneering companies have indeed thought through the potential impacts of climate change in a systemic way, a number still focus narrowly on the potential physical impacts on corporate assets. Further, in so doing, too many companies then solely consider the ‘central estimate’ of future climate projections – rather than the more extreme scenarios that present the most risk.

As a result, many companies falsely reassure themselves that they are protected against climate risk, when, in fact, they’ve barely scratched the surface.

8 simple rules

So what to do about it?  Well, first of all, use the diagram above to start thinking about how your company might be exposed to climate risk.

Secondly, bear in mind the following ‘ground rules’:

  1. Climate change will not only impact corporate assets and operations – it will also impact supply chains, markets, workforces, and the broader infrastructure upon which they depend.

  2. It is important to consider the widest possible range of impacts, including low-probability outcomes with potentially large consequences.

  3. As well as posing discrete risks of its own, climate change will interact with and exacerbate other risks (e.g. relationships with government and/or commercial partners, or the availability and efficiency of labour).

  4. Current climate impacts/trends are not a reliable indicator of impacts-to-come – the future will be more disruptive, and will include ‘surprises’ as well as trends.

  5. The corporate approach to climate risk must therefore be dynamic and adaptive.

  6. Climate change poses significant enough risk to mandate regular consideration and discussion at senior management and board level.

  7. A consideration of climate risk must be built into standard business management processes and embedded across all corporate divisions (i.e., it cannot be the sole responsibility of the sustainability team).

  8. No one company acting alone can truly ‘protect itself’ against climate risk. Partnership and collaboration – pre-competitive, in and across industries, and with government and communities – will be key.

Iain Watt is a principal sustainability advisor, Forum for the Future. This post is republished from the Forum for the Future blog.

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