Companies Get Serious About Climate Change

Stephen DeAngelis

February 07, 2020

Everyone is familiar with the canary in the coal mine analogy. Currently, there are a couple of such canaries on the world stage — Venice and Australia. Venice is flooding and Australia is burning. Both situations are attributed to and exacerbated by climate change. McKinsey analysts Dickon Pinner and Kevin Sneader ask, “Does your business treat climate change as a far-off risk, something for the future but not a priority today?”[1] They warn, “That’s a mistake. Climate change is here. Its economic impact is real and growing, and action now is essential.” Stephen Fidler (@StephenFidler1) reports, “Environmental risks have jumped to the top of the concerns of government, academic and business leaders over a 10-year horizon as the effects of climate change have struck harder and more rapidly than many expected.”[2] Pinner and Sneader insist, “Business leaders can no longer ignore the physical effects of climate change, at least not without peril. Global infrastructure, supply chains, food systems, asset prices, land and labor productivity, and economic growth itself are increasingly at risk of deterioration due to a rapidly changing climate. And a more connected global economy means that risk in one part of the world will often extend well beyond the place of immediate impact.”

Climate change is a serious problem for businesses

Avery Thompson reports, “The world’s scientists are increasingly worried about our civilization’s reluctance to tackle climate change, so … thousands of them are raising the alarm. In a report published in the journal BioScience, over 11,000 of the world’s leading climate scientists have added their names to a declaration calling the planet’s current warming trends a ‘climate emergency’.”[3] With many politicians turning a blind eye toward climate change and consumers demanding action to counter it, business leaders feel the leadership mantle falling on their shoulders. They are also beginning to realize it’s in their own best interests. Ian Stewart (@IanStewartEcon), a chief economist for Deloitte LLP in the U.K, notes, “From an economic standpoint, climate change poses three categories of risk. The first is physical damage caused by increasingly volatile and severe weather. … The second is transition risk, where an abrupt and disruptive shift to a low-carbon economy hits the financial system and the economy. … The third is the risk of businesses facing demands for compensation. Individuals or groups who suffer as a result of climate-related events may seek to make a claim against companies they deem responsible.”[4] He adds, “Add up these risks and it’s easy to understand why central bankers are warning climate change poses systemic risk to the financial system and an existential threat to industries and companies that do not adapt.”

Stewart’s Deloitte colleague Kristen Sullivan (@KBSull21), insists, “Companies and business leaders have critical roles to play. … They must respond to investors, who increasingly view climate risk as an important and integral element in evaluating company value and growth prospects. Investor demand for greater transparency into companies’ climate risk exposure — what they’re doing to mitigate those risks and how they can seize competitive advantage from those transition risks — is growing, and we’re seeing companies take note. … Ultimately, the market requires transparency and meaningful performance disclosure to effectively price climate risk.”[5] Fidler reports respondents who took part in a World Economic Forum survey, “ranked extreme weather, failure to act on the climate, natural disasters, biodiversity loss and man-made environmental disasters as the top five risks in terms of likelihood over the next 10 years.” He writes, “Three of these — lack of action, biodiversity loss and extreme weather — were ranked among the top five risks expected to have the greatest global impact over the next 10 years. The two other top-five worries in terms of impact were weapons of mass destruction and water crises.” Brian Laung Aoaeh (@brianlaungaoaeh), Co-founder of REFASHIOND Ventures, insists businesses will be forced to be proactive because climate risks will affect global supply chains. He notes, “First, severe weather events [will] become increasingly disruptive to industrial supply chains, pushing up the cost of insuring corporate supply chains; and second, the outcry about climate change [will] increase and consumers [will] start voting with their wallets as well as their votes.”[6]

One of the most devastating impacts of climate change is likely to be rising sea levels. As noted at the beginning of this article, Venice is already experiencing the devastating effects of rising sea levels. Katie Pyzyk (@_PyintheSky) reports a new study concludes, “Coastal flooding (at least once per year) will reach levels where 300 million people currently live, and more than 150 million people live in locations that could be permanently inundated by 2050.”[7] Along U.S. shores, she reports, “Whole cities could be inundated; … for example, most of New Orleans and large portions of New York are among the numerous communities shown to be underwater or prone to frequent, severe flooding by 2050.” Flooding devastation could be worse elsewhere around the world. “The areas of most concern are concentrated in developing countries in Asia,” Pyzyk writes. “More than 70% of the world’s population currently living on implicated land are in just eight Asian countries: Bangladesh, China, India, Indonesia, Japan, the Philippines, Thailand and Vietnam. However, the increased flood risk touches every continent.” Such severe flooding will disrupt supply chains and create social, financial, and political chaos.

What can companies do?

Pinner and Sneader write, “All businesses — whether involved in energy production or not — can take the following steps right now to be well-prepared for climate change.” Those steps include:

First, assess and plan. “Doing this right requires conducting a detailed review of all the potential risks to your enterprise from physical climate risk. Use the latest climate modeling and look for systems within or connected to your enterprise that may fail as the world gets steadily hotter and more volatile.”

Second, protect your assets. “Armed with this transparency and knowledge, a company can create a set of resiliency and adaptation measures to reconfigure internal operations and supply chains, redirect capital to growth areas and new business, and protect assets.”

Third, decarbonize your operations. “Consumers are demanding climate-friendly products and services and that demand will only grow. A core ingredient for this is to take carbon out of your own operations, something that will soon become table stakes for all companies to be credible with consumers and regulators.”

Fourth, make climate intelligence a core capability. “Climate risk assessment and management should be integrated into all key business processes: strategic planning, capital allocation, supply chain management, and product development, to name a few. Companies that increase the awareness and transparency of their physical climate risk with employees, customers, suppliers, and investors will be more prepared to manage the pervasive and cross-cutting nature of climate risk.”

Concluding thoughts

Pinner and Sneader conclude, “For centuries now, the global economy has taken climate stability for granted. Investing, buying, selling, borrowing, and lending all require a degree of confidence that tomorrow will be pretty much like today. But climate change is introducing new uncertainty, threatening to upend our assumptions about future growth and prosperity. The next decade is decisive. Acting now to prepare your enterprise for climate change has a double payoff. Not only will it help you build a lasting commercial advantage, it will also help raise the odds that we avoid potentially catastrophic runaway climate change in the second half of the century.” Dr. Ira Kalish, chief global economist at Deloitte Touche Tohmatsu Limited, concludes, “It is clear the private sector is critical to helping solve this challenge. We have begun to see global business leaders making that commitment. … Company leaders can frame the economic risks and opportunities appropriately, communicate them to boards and investors, and decide that changing their business models and allocating capital to reposition for a low-carbon economy are strategic priorities.”[8]

Footnotes
[1] Dickon Pinner and Kevin Sneader, “Earth to CEO: Your Company Is Already at Risk From Climate Change,” Fortune, 3 September 2019.
[2] Stephen Fidler, “Environmental Risks Loom Large Among World Economic Forum Members,” The Wall Street Journal, 15 January 2020.
[3] Avery Thompson, “Scientists Around the World Declare ‘Climate Emergency’,” Smithsonian Magazine, 5 November 2019.
[4] Andy Marks, “Climate Change Risks and Challenges for the C-Suite,” The Wall Street Journal, 30 September 2019.
[5] Ibid.
[6] Brian Laung Aoaeh, “Commentary: What’s ahead for climate change and industrial supply chains,” FreightWaves, 30 December 2019.
[7] Katie Pyzyk, “Report: Sea level rise to affect 3x more people than anticipated,” Smart Cities Dive, 31 October 2019.
[8] Marks, op. cit.