Time for Businesses to Assess Their Climate Risks, Threats and Opportunities
This post appeared first at The Sarasota Institute - a 21st Century Think Tank.
Adapt to Survive
Even if global efforts succeed in eliminating emissions over the next ten years, our atmosphere will continue to warm. CO2 remains resident in the atmosphere for approximately a century. Any additional emissions (which will continue for a decade at minimum) add to the accumulation of CO2. As of May 2022, global fossil fuel consumption and greenhouse gas emissions continue to grow. That means additional warming, wildfires growing in frequency and intensity, sea levels rising at an accelerating pace, and more extreme weather events.
It is too late to prevent all but the worst of climate impacts. So, we must adapt to minimize the damages and threats to our businesses, our stakeholders, our communities, our families and ourselves. These adaptations will be numerous. They must be budgeted and planned for.
Climate impacts will vary depending on a business’s locations, products, services, supply chains and many other characteristics. The good news is that the impacts won’t all occur at once. It’s possible to prioritize risks and opportunities. Each business should urgently address impacts that are likely to occur sooner rather than later, and those that will have the most negative effects.
Businesses can anticipate and prepare for these changes in advance. It will be much more cost effective to do so, rather than wait and be forced to recover from a disaster. Preparing for these changes is an opportunity to upskill workforces, and to develop and sell innovative solutions.
Strategically managed businesses will act… not react after the fact. Most businesses will wait for catastrophic events and then try to adapt and recover. The minority who plan and adapt before an impact, will continue to thrive.
They will anticipate and plan to make the necessary changes before forced to do so. Governmental regulations are only going to increase over the course of the next decade, and the companies making the right decisions and investments today will be best placed to reap the benefits.
Mandates don’t bestow competitive advantage. And carbon footprint reductions will not safeguard a business from the threats of our climate crisis. Nor will they unearth climate opportunities specific to a business.
Many large companies already have climate goals. But few have actually embedded climate action throughout every department. As governments around the world take action to make drastic cuts in emissions, all businesses urgently need to incorporate long-term thinking about the environment into their plans. It is not just carbon-fueled companies who will pay the price when the acute effects of this crisis unfold.
Today, climate literacy is as important as computer literacy. I define climate literacy as a level of understanding that enables an individual to connect the dots between climate impacts and business operations. They can apply an organization's capabilities to develop climate solutions.
A comprehensive plan and strategy for handling the specific risks and opportunities an organization faces includes determining which risks can be insured, which risks can be mitigated (by, for example, erecting a sea wall, relocating a warehouse that is in a forest fire zone, hardening a structure to withstand stronger hurricanes, etc.), and which opportunities an organization is equipped to take advantage of.
What are our commercial opportunities with climate change solutions?
What are our reputational opportunities with climate change solutions?
What is the potential ROI of a particular climate solution that a specific business is capable of developing?
What R&D should be undertaken to prototype that solution?
Strategic foresight creates functional views of alternative futures. It differs from traditional market forecasting which extrapolates past data to predict the future. The volatility and velocity of today’s world renders predictions based on historical trends worthless. Our climate crisis is unprecedented.
Adapting to and mitigating climate change (including developing innovative products and services) will supply an organization with compelling stories that resonate with customers, investors and employees. One first step: make sure that every stakeholder actually understands how climate change works. Stakeholders can address the risks of climate impacts only if they understand them clearly and see the nuances that make them so complicated to confront.
Transformation of a company’s operations may be required as our climate crisis worsens. To prepare, businesses must think about their processes at a deeper level. How do we protect company assets from climate shifts? How can we better understand climate impacts on our suppliers? How can we help our customers deal with the impacts they are/will experience?
Don’t just look at core operations. Examine enterprise viability. Take into account electrical, water, and transportation infrastructure as well. They are likely to be affected by severe weather events and other climate impacts, and this can have a knock-on effect across an entire company.
A broader view of climate risks is required to anticipate and minimize potential damage, disruption and even destruction. That means investigating how a business’s locations, employees, customers, vendors and other stakeholders may be affected.
Climate also has knock-on effects across regions and sectors, through interconnected socioeconomic and financial systems. For example, flooding in Florida (from sea level rise and more severe hurricanes) will not only damage housing but also raise insurance costs, lower property values, and reduce property-tax revenues.
Institutions that businesses depend on such as insurance companies and banks will make changes to their business models as conditions worsen. Insurers will be dropping some coverages and adding others. Banks will change their loan criteria. A business may not be able to borrow for certain initiatives. This is why it’s important not to settle for a superficial analysis of operations.
Consider whether the business’s products are essential and if they’re worth the resources that it takes to make them. Do they fulfill an important human need? Do they cause greenhouse gas emissions in their manufacture or use? What about other waste products? The end game will be a completely circular economy. Each business should investigate in how they will transition to “circular”.
The Global Commission on Adaptation estimates that investing $1.8 trillion to climate-proof businesses and the broader economy between now and 2030 could generate up to $7.1 trillion in net benefits. Investing in adaptation, and in the innovation that comes with it, can unlock new opportunities and spur change across the globe. Adaptation can provide a triple dividend: it avoids economic losses, produces positive gains, and delivers additional social and environmental benefits.
Parts of the world are projected to become uninhabitable in the near future. Where will your target market be living and what will their priorities be by then? For example, Lake Mead and Lake Powell, the country’s two largest reservoirs, are drying up. The Hoover and Glen Canyon Dams harness the gravitational force of the Colorado River’s water to generate power for 5.8 million homes and businesses. A severe and extended drought is threatening both cheap, clean electric power and water for agriculture and home use. It’s entirely possible that the southwest will see a mass migration of climate refugees. How might that affect local businesses?
On May 3, 2022, a New York Times article covered a new Nevada state law. The law requires lawns in and around Las Vegas be removed in favor of more desert-friendly landscaping. The law is designed to conserve water. Businesses have to remove their turf lawns and cover the ground with gravel and/or plants that don’t require watering. Landscaping businesses have a near term opportunity removing the lawns. But what happens after the lawns are gone? Much less need for landscapers. Could this have been foreseen? Absolutely.
The future is not something we arrive at so much as something we create through our actions in the present. The future is less a noun than a verb… a thing we do. We deploy futures thinking to develop adaptation scenarios.
Effectively addressing the breakdown of our global ecosystem requires that businesses develop, deploy and offer solutions that work to prevent further ecosystem degradation and prep for adapting to climate impacts. It’s cheaper, it’s more resilient and, in the near future, customers won’t buy from companies who don’t take action. If management doesn’t understand this, then employees will look for a more strategic company to work for. There is evidence that this is one of the contributing factors to The Great Resignation.
Futures thinking visualizes the coming transformation towards a regenerative zero carbon economy, and the role a specific business can play within this transformation. Adapting to our climate crisis poses challenges to decision-makers who need to determine now how to adapt for the future impacts of a rapidly changing climate. Adaptation to climate impacts is both a critical long-term need and a short-term imperative. The social and economic context for adaptation will inevitably change over time.
Adaptation planning provides a multitude of benefits:
Flexibility – Embrace uncertainty and change. Consider political uncertainty alongside other societal, economic, environmental and technological trends. Develop multiple future scenarios to supply a number of Plan Bs that can be switched to if /when trends do not play out as anticipated.
Cost-effectiveness – Because the scenarios approach considers multiple strategies, it helps reduce the risk of over or under investing in adaptation. Budgets for a variety of potential adaptations can be developed with cost/benefit analyses.
Transparency in decision-making – Climate adaptation thresholds are set into existing decision-making processes, which support implementation. They create a long-term approach for adaptation planning that enables implementation over time.
Examples of resilience planning for a world of rising climate hazards include:
building inventory levels in supply chains to protect against interrupted production,
establishing the means to source from alternate locations or suppliers, and
securing backup power sources.
Making your business resilient to climate impacts will require investments. Many companies have adopted a “wait and see” attitude, expressing confusion about what to do next. Strategists don’t passively wait for the inevitable. After hurricane Sandy, Bloomberg moved its data center out of Manhattan in anticipation of future flooding events.
A U.S. power company with 15 million customers, California Edison, was responsible for two deadly wildfires in 2017 and 2018. Its electrical wires sparked the blazes. So the company set aside a $4.7 billion reserve fund for possible liabilities related to future fires. More recently it embarked on a costly program to upgrade its electrical lines and make its grid less likely to spark fires. The company is replacing 6,000 miles of bare electrical wire to reduce fire risk, installing thousands of micro weather stations that monitor temperature, humidity and wind speeds, and swapping the oil in its transformers with a less flammable alternative.
The core of what it takes to stay in business and prosper is still the same: the unwavering pursuit of stakeholder value, tending to the needs of communities where a business operates and staying on the right side of regulators. A company can survive and thrive during this extended crisis if it takes the right steps to adapt to these new conditions. And the marketplace will reward the business as customers and other stakeholders perceive the organization as an innovative, forward looking corporate citizen.
A company’s climate actions must have traction… they must be more than window dressing. We live in a transparent world. Customers and potential employees are sophisticated. They will see through any attempts to “green wash” and will hold companies accountable.
Our climate crisis guarantees that we will live in a VUCA (Volatile, Uncertain, Complex and Ambiguous) world for decades. Every person and every organization will be impacted. These impacts won’t be the same for all. Each company can expect different risks and opportunities. It’s time to assess risks and plan for them. Those companies who assess and plan for climate impacts, and take responsibility to transform their operations, will be best adapted to thrive in our VUCA future.
In future columns I will discuss the climate impacts specific industries can expect to experience, the actions they can take to reduce risks and to discover their climate-related opportunities.