The Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) stated that climate change is unequivocal and very likely caused by human activities. Recently a group of more than 90 chairpersons and CEOs submitted their climate policy recommendations to G8 leaders, urging them to provide adaptation assistance to countries most vulnerable to climate impacts.

There is evidence that even if significant emission reductions are made, society will need to cope with a changing climate over the next 40 years due to historic emissions. The consequences of this cannot be ignored by society or business.

Assessing and understanding climate risk is becoming a core business strategy. Failure to do so may pose a serious threat to the existence of business. It also presents risk to consumers, investors and employees. Three recent reports assessing the industry response to climate risk identified the importance of understanding climate risk for business:

• UKCIP & Acclimatise - “The adaptation tipping point: are UK businesses climate-proof?”
  An increasing awareness of climate risk has led 10 per cent of FTSE 100 companies to consider the impacts of climate change as a potential high risk to their business operations. It also highlighted that adaptation is not as well understood as mitigation, and that for businesses to be successful in the future, climate risks will need to be taken into account today,and adaptive strategies and actions developed, to manage uncertainties.
• Pew Centre - “Adapting to Climate Change: A Business Approach”
  Climate change has implications beyond the direct effects of weather on buildings and operations and should be an integral component of long term planning for many businesses. It cautions business to be aware of the potential threats of climate change.
• 2007 Carbon Disclosure Project (CDP)
  Indicates that nearly 80 per cent of corporate respondents accept the commercial risks due to climate change but are less concerned with the physical effects. Only sectors with significant operations in areas subject to extreme weather events, such as the Gulf Coast of the USA, consistently listed physical risks as a concern of climate change.

What is business doing?

Not all companies are required to analyse and integrate into their business decisions the risk of climate change. Physical effects of climate change vary geographically. Those most likely to be affected are companies planning to invest in infrastructure projects and agriculture, construction and transport dependent businesses. In particular, infrastructure projects are increasingly forced to withstand frequent and extreme weather events, greater climate variability and changes in climate norms. Few governments and local councils have initiated efforts to deal with climate change effects on their infrastructure projects. However, awareness of climate risk is growing across all areas of government and business. Some recent initiatives are:

• The New Zealand Centre for Ecological Economics is conducting research to assist New Zealand infrastructure owners and managers to consider the impact of climate change on their assets through a program called CLINZI.
• The New South Wales government, with the help of NSW Greenhouse Plan, is helping the community and business to adapt measures to minimise the impacts of climate change.
• The Australian government has allocated A$2 million for the first stage review of the reference manual for engineering works in Australia, addressing the potential impact of climate change on infrastructure projects in the country.
• The insurance sector is developing products, services and partnerships to help manage the risk of climate-related impacts through risk transfer, risk pooling and other risk reduction strategies (for example weather derivatives).
• Numerous federal government departments and agencies are involved in research on climate change adaptation for infrastructure. For example, Infrastructure Canada (INFC) and Natural Resources Canada, along with many other government agencies in Canada, are either leading or partners in research projects related to climate change adaptation for infrastructure.

The impacts of climate change are uncertain and so are the business responses. The adaptive capacity of business depends on its size, location and sector. Strategies to cope with climate change need to be based on careful assessment of the vulnerability of all these factors.

Analyse climate risk

Analysing climate risk, along with customised tools and developing a climate risk framework, helps business understand the effects of climate change.

For example, UK water services and house building companies are developing practical tools for companies to deal with vulnerability issues, response capability and adjustment options. The Australian government has prepared a guide to assess climate change risks to business through development of a risk framework that integrates climate change affects. And mining giant Rio Tinto is using high resolution climate modelling to conduct detailed site assessments and gauge risks for high priority assets.

Weigh up the options

Firstly, prioritise the various adaptation measures and alternative options available. Consider the magnitude, severity, certainty, timing, likely losses and probability of occurrence. Then identify different adaptation measures and costs involved, giving high preference to ‘most likely’ climate change risks. Finally, select the best option based on timing, priority, cost, efficacy and availability of resources and skills.

A costing methodology developed by the UKCIP helps to address climate change risks and uncertainties in the decision making process. Recently, a European natural gas company evaluated potential physical climate change impacts on the company’s assets according to the different scenarios, and estimated the expected financial exposure. This helped prioritise their investment decisions to adapt measures that address climate change physical risks. Entergy in New Orleans suffered US$2 billion in losses from Hurricanes Katrina and Rita and have chosen to relocate important business centres to areas less vulnerable to severe weather events to minimise future climate risks. Travelers, a major insurance company in the USA, is exploring new pricing strategies to encourage adaptive actions from its commercial and personal customers.

Adaptation price

Organisations should integrate adaptation price into future proofing processes for the planning and design of multi-million dollar infrastructure projects. Final costs should embed the costs required to address any physical risks due to climate change, any increase in climate-related hazards and any climate-driven change in natural resources used by the asset, including changes in vulnerability of the receiving environment of discharges and emissions. The adaptation price should reflect the adaptive capacity of business and avoid any unsustainable investments that increase the adaptation price. This approach is already being encouraged for selected projects in developing countries by entities such as the World Bank and the Asian Development Bank. Similar proactive approaches are also being adopted by national and local governments. This is likely to drive change amongst developers and infrastructure providers, with some competitive advantage for early movers.

Conclusion

There is no one size fits all approach to deal with the physical effects of climate change. Strategies to cope with climate change need to be based on a careful assessment of the vulnerability of individual regions, sectors, and companies. Assessing and understanding climate risk is becoming one of the core strategies for businesses vulnerable to the physical effects of climate change. Failure to do so will pose a serious threat to the sustainability of businesses.

© Sinclair Knight Merz
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