The Anthropocene – 3 Reasons Why It Matters to Your Business

 
David Pope, Scratch Media, https://www.scratch.com.au/

Introduction to the Anthropocene

In a wonderful new book, professors Simon Lewis and Mark Maslin at London University College, make a convincing case that the Earth has entered the Anthropocene (combining the Greek words for ‘human’ and ‘recent’). Humans have literally become a force of nature. Meaning that human activity changes the Earth from one state to another. To define the Anthropocene, these scholars define a framework in three parts:

  1. Is there evidence that human activity has begun to push the Earth in a new state? In short, yes. GHG emissions are delaying the next ice age and human actions are influencing evolution. Both will show in future fossil records.
  2. Is the new state marked in geological deposits? Again, the answer is yes. Changes in carbon dioxide levels are stored since the expansion of farming. Pollution of the Industrial Revolution shows in swamp sediments, and trees recorded nuclear fallout.
  3. When did the switch occur? From four candidates, the authors settle on the Columbian Exchange and the resulting Orbis spike (a lowest point in CO2) as the start of the Anthropocene:

(..)following Columbus’ 1492 arrival, approximately 50 million people in theAmericas perished and farming collapsed across a continent. (..) Vast areas ofland grew back to forest, removing billions of tonnes of carbon out of theatmosphere and into the new trees. This is seen as a dip in levels ofatmospheric carbon dioxide (..), with the lowest point being at 1610, capturedin Antarctic glacier ice [i.e. the so-called Orbis spike].

How Lewis and Maslin lead us towards these conclusions is a fascinating read. If you loved Guns, Germs and Steel, Sapiens, The Mating Mind, and The Origins of Political Order, you will love this book. (All of these books are highlighted in another post by the way, you can read that post here.) Below is a nice info-graphic that shows (some) of the topics they will run you through:

Source: UCL, https://www.ucl.ac.uk/news/2018/jun/scientists-propose-changing-rules-history-avoid-environmental-collapse

Why Should Managers Care About the Anthropocene? 3 Reasons.

I can almost hear you think: “All well enough that this is a great read, but why is this also a great read from a business perspective?”. Here are my 3 reasons:

1. The Anthropocene has found its way into mainstream vocabulary in relation to externalities of the firm. The term Anthropocene is a matter of huge debate (whether or not we should officially use the Anthropocene as a new geological time scale that follows the Holocene, that is). The debate itself is of little consequence for business. What is of consequence, however, is that it entered mainstream vocabulary. The link to externalities of the firm are easily made, and that’s why you should familiarize yourself with the term. [An externality is, as you know, a negative consequence of an economic activity experienced by unrelated third parties.] Like climate change entered the mainstream vocabulary in the nineties, the Anthropocene is popping up more and more. Leading newspapers, journals and organizations have already picked up on it, see for example: Nature, Wall Street Journal, the World Economic Forum, and the Guardian. There’s even a multi-media project consisting of a movie, a book, exhibitions and an interactive website that is getting a lot of media attention. This paves the way for systems thinking and more and more people and organizations will start asking questions how your business operations (as an integral part of the Anthropocene) affect the Earth’s systems. Do you already have an all-encompassing answer to this question? Do you have innovative sustainability strategies in place that take into account the Anthropocene is a central concept? Do you have the reporting processes in place to tackle this question?

2. The Anthropocene is central to the rise in ESG-pressures on your firm. Understanding the Anthropocene will answer the question where the ever increasing ESG-pressure on firms is coming from. Since more and more people will understand that the Earth is a closed system (see reason number 1), you can expect that every impact your business has on that system will, sooner or later, be under scrutiny. I argue that putting the era in which we live, i.e. the Anthropocene, as the all-encompassing force on Earth’s systems and, in turn, on people’s well-being, gives you a model to understand why there’s a proliferation of social movements and NGO’s pushing for changes in laws, regulations, reporting practices and business models. A possible depiction of how the Anthropocene ̶  through its pressure on physical and social systems  ̶  sets off pressures all the way down to the level of the firm to change business models, business processes and business practices, could look like this:

sleemanconsulting.com

3. The Anthropocene can be used as a super-structure for all ESG-related topics. If you, like me, have struggled how all different topics in the ESG-realm fit together, the concept of the Anthropocene can be used as a helpful tool. By plotting both social and natural/physical topics in the figure above, you have a super-structure where you can find all ESG-topics that might influence your firm’s business model, strategy and processes. This might be a useful addition to tools that you already have in place (e.g. a materiality or priority matrix) and can be used to track and make sense of topics as diverse as the Paris Agreement, Planetary Boundaries, the SDGs or radical transparency. I plotted a number of well-known concepts in the figure above to end up with the figure below:

sleemanconsulting.com

Why to read “The Human Planet – How We Created the Anthropocene”

The Anthropocene, with all that it entails (just a few of the topics, covered in the book, you should know about are: humans as a force of nature; positive feedback loops; complex systems; utilization of ever more energy; generation and processing of more information; increase in collective human agency) is a handy super-framework to connect ESG-topics that might have been considered separately without such a framework.

Even if you do not see the connection to your firm’s ESG-efforts, strategy or processes, and even if you do not see the need for defining a new geological time scale (I couldn’t care less; also see this article in Scientific American), this is a book worth reading. As the reviewer in the Guardian wrote:

‘Brilliantly written and genuinely one of the most important books I have ever read.’

Please share my blog post with your networkEmail this to someone
email
Share on LinkedIn
Linkedin

ESG-Disclosure Using The Economist as a Proxy (2)

The second installment in an effort to distill relevant ESG-topics from The Economist has notable differences from the first effort (see here). Digging through the second series of four months of articles (May to August), I found that:

  • climate change remains the number one topic;
  • green technology is in firm second place;
  • governance more or less keeps the same spot in the matrix;
  • pollution gets a lot less attention but remains important in terms of impact on a firm’s profitability;
  • environmental laws are a new category with potentially big impacts on business models (not including climate policies, which I include in the climate change category);
  • new these last months, is the coverage of ecology, conservation and environmentalism (which I grouped under ‘ecology’); although important from a stakeholder’s perspective, I opted to put ecology to the left of all other categories since the subjects at hand still need to find their way into the mainstream; on top of that, laws and regulations on these topics seem further away then the ones on, for example, climate change and governance.

The picture above follows, again, the format of a Materiality Matrix, with the number of articles per topic on the Y-axis and the – debatable – impact on a firm’s profitability if this topic is not tackled by its management, on the X-axis. If The Economist can be used as a guide, you should, in addition to the topics that were already present in last month’s Materiality Matrix (i.e. climate climate change, green technology, pollution and governance) consider disclosing information on your efforts towards a healthy ecology. As far as new environmental laws are concerned, these were of course already included in your risk management approach.

Below, some interesting snippets taken from the articles can be found, grouped per topic. (Most quotes are adopted directly from The Economist).

Climate Change

Interesting facts taken from all articles in the group ‘climate change’:

  • Businesses are overvalued because of a “carbon bubble” and could suffer if the climate threat is tackled resolutely. A study at Oxford University found that electricity producers would have to retire a fifth of capacity, and cancel all planned projects, if the Paris goals are to be met.
  • What is the single most effective way to reduce greenhouse-gas emissions? Go vegetarian? Replant the Amazon? Cycle to work? None of the above. The answer is: make air-conditioners radically better. On one calculation, replacing refrigerants that damage the atmosphere would reduce total greenhouse gases by the equivalent of 90bn tonnes of CO2 by 2050. Making the units more energy-efficient could double that. By contrast, if half the world’s population were to give up meat, it would save 66bn tonnes of CO2. Replanting two-thirds of degraded tropical forests would save 61bn tonnes. A one-third increase in global bicycle journeys would save just 2.3bn tonnes.
  • Scientists have laid out steps that Arab countries could take to adapt to climate change. Agricultural production could be shifted to heat-resilient crops. Israel uses drip irrigation, which saves water and could be copied. Cities would be modified to reduce the “urban heat-island effect”, by which heat from buildings and cars makes cities warmer than nearby rural areas. Few of these efforts have been tried by Arab governments, which are often preoccupied with other problems.
  • Virtually all simulations which chart paths toward meeting the Paris climate agreement – to keep temperature rise “well below” 2°C relative to pre-industrial levels – assume not just a sharp reduction in actual emissions but also the removal of carbon dioxide from the atmosphere on a massive scale.
  • In Canada, provinces can control emissions in their own way. British Columbia has already introduced a carbon tax (now C$35 a tonne). Alberta charges C$30 a tonne. Ontario’s cap-and-trade scheme would have qualified. If a province fails to tax or cap emissions, the federal government will impose a tax.
  • Three years after countries vowed in Paris to keep warming “well below” 2°C relative to pre-industrial levels, greenhouse-gas emissions are up again. So are investments in oil and gas. In 2017, for the first time in four years, demand for coal rose. Subsidies for renewables, such as wind and solar power, are dwindling in many places and investment has stalled; climate-friendly nuclear power is expensive and unpopular. It is tempting to think these are temporary setbacks and that mankind, with its instinct for self-preservation, will muddle through to a victory over global warming. In fact, it is losing the war.
  • Two social psychologists have found that Republican voters will back carbon taxes if they are told Republicans favour such a policy.
  • The number of Europeans who can expect to witness a temperature above the current record, wherever they happen to live, would double from 45m today to 90m if the planet warmed by another 0.5°C or so on top of the 1°C since the 1880s. If, instead of 0.5°C, it warmed by 1°C, the figure would rise to 163m.This looks even more alarming if you factor in humidity. Human beings can tolerate heat with sweat, which evaporates and cools the skin. That is why a dry 50°C can feel less stifling than a muggy 30°C. If the wet-bulb temperature (equivalent to that recorded by a thermometer wrapped in a moist towel) exceeds 35°C, even a fit, healthy youngster lounging naked in the shade next to a fan could die in six hours.
  • A report published on August 6th by Sarasin & Partners, an asset manager in London, suggests that oil firms are assuming that decarbonisation will be limited and are thus overstating their assets. Sarasin notes that eight European oil giants all used long-term oil price assumptions of $70-80 a barrel, rising by 2% a year with inflation to $127-145 by 2050, to price their assets. But that does not appear to assume any drop in demand. The International Energy Agency predicts a price of just $60 by 2060; Oil Change International, an activist think-tank, estimates one as low as $35. Oil firms could face a sticky mess of forced writedowns.
  • A new IMF working paper finds that taxes raise around twice as much revenue as today’s cap-and-trade schemes, and are roughly 50% better at cutting emissions.

Green Tech

Interesting facts taken from all articles in the group ‘green tech’:

  • Plastic production has tripled over the past 25 years, and the mess it causes has risen commensurately. Recycling is an option. Another is biology. At Stanford University, they found that bacteria in the guts of mealworms can break down polymers faster than fungi and bacteria can.
  • Six of the top ten producers of solar-panels are Chinese.
  • Though solar was the world’s biggest source of new power-generating capacity last year, it still generates a paltry 2% of global electricity.
  • Materials-science researchers are finding that plant fibres can add durability and strength to substances already used in the construction of buildings and in goods that range from toys and furniture to cars and aircraft. A big bonus is, because plants lock up carbon in their structure, using their fibres to make things should mean less carbon dioxide emitted. The production of concrete alone represents some 5% of man-made global CO2 emissions, and making 1kg of plastic from oil produces 6kg of the greenhouse gas.
  • In the bike-mad Netherlands nearly one in three newly bought bikes last year was electric.
  • Acid rain damages crops. In particular, it damages rice. I can be cleaned with water but it is not always obvious when it needs to be cleaned. A cheap method now has been found: rice plants sprayed with artificial acid rain, cut the release into the soil of three relevant bacterial food stuffs. The electric current the bacteria in the ground generate consequently drops. This is easily measurable using cheap electrodes.
  • India has plans for alternative means of generating electricity. Even before the Paris summit, Narendra Modi, the prime minister, aimed to install 175 gigawatts (GW) of renewable-energy capacity by 2022, a vast increase from today. That has now risen to 227GW. In the meantime, prices of wind and solar power have tumbled. Recent auctions have led to a 50% drop in the cost of solar power in the past two years, to about three rupees ($0.05) per kilowatt hour, about the same as wind. This can make both sources cheaper than building new coal-fired capacity. An excise tax on production and imports makes coal ever less attractive. After a massive spree of building coal-fired power plants in recent years, investment slumped last year, while that in alternatives surged.
  • A view prevails that the blockchain will guzzle too much electricity for energy applications to make sense. But this assumes that projects will use a public blockchain such as bitcoin, which anyone can access with the right software, requiring lots of computing power and time to verify each transaction and protect the blockchain. Energy firms could in fact employ blockchains in which only trusted participants can join, making the process of maintaining the blockchain faster and less energy-hungry.
  • America’s Forest Service uses a model to assess fire risk. This model feeds on data on the distribution and types of trees, bushes and other vegetable ground cover, and on construction materials used in an area. Such intelligence will be needed increasingly in the future. Predictions based on the likely effects of climate change suggest that, by the middle of the century, fires will burn twice as much acreage as they do today.

Pollution

Interesting facts taken from all articles in the group ‘pollution’:

  • Two books have been reviewed that have the Flint water pollution disaster as a subject: Had the dirty river water been treated with the right chemicals, thousands of people would not have been poisoned by lead and bacteria, including one that causes Legionnaires’ disease. But to save more cash, the city declined to add anti-corrosion agents that would have stopped the water eating away at the lining of the pipes, thus preventing lead from leaching out. That might have cost around $100 a day—peanuts compared with the hundreds of millions that the state and federal governments are now forking out to repair some of the damage. These two books both show how an austerity drive with racial undertones led to the mass poisoning of mostly poor and black residents, and how officials tried to cover it up, attempting to discredit anyone who came up with proof that the water was tainted.
  • Also on Flint: to almost everyone’s surprise, the citizens of Flint prevailed in March 2017, when the government agreed to an expensive settlement in the first type of lawsuit. The state of Michigan agreed to spend at least $87m to replace lead-contaminated water pipes in Flint within three years. The settlement also required the city to run at least two centres where residents could pick up free bottled water and tap-water filters until September 2017, and beyond that if tests continued to show that Flint’s water was contaminated. The government stopped the giveaway in April this year, saying the city’s water passed the test; Karen Weaver, the mayor of Flint, retorts that many of her constituents still do not trust it.
  • Kapuas, Indonesia’s longest river, is murky because of deforestation. Since the 1970s, logging has enriched locals while stripping away the vegetation that held the soil in place. The Centre for International Forestry Research (CIFOR) found that between 1973 and 2010 over 100,000 square kilometres of forest was lost on Kalimantan, or a third of the original coverage. A national moratorium that began in 2011 has done little to still the axes. As a result, torrential tropical rains wash lots of loose earth into the Kapuas.

Governance

Interesting facts taken from all articles in the group ‘governance’:

  • Plato argued that the richest members of society should earn no more than four times the pay of the poorest. John Pierpont Morgan, a banker, reckoned that bosses should earn at most 20 times the pay of their underlings. Investors today hold chief executives in vastly higher esteem: America’s largest publicly listed firms on average paid their CEO 130 times more than their typical workers in 2017.
  • “I fear that we may be at a peak of anti-bribery efforts”, says a spokesperson of Transparency International. Western firms in the mining and oil-and-gas industry grumble that rivals from China, Russia or elsewhere have “advantages” bidding for contracts in say, parts of Africa, as they face few limits on bribe-paying. If such complaints grow loud, pressure not just to stand still on anti-bribery standards but actually to lower them could return.
  • In India, women are less likely to work than they are in any country in the G20, except for Saudi Arabia. They contribute one-sixth of economic output, among the lowest share in the world and half the global average. The unrealized contribution of women is one reason India remains so poor.
  • On Danone: The latest effort is to win certification as a “B Corporation”, a label meant to reflect a firm’s ethical, social, environmental practices. Smaller outfits, such as Patagonia, a clothing firm, or Ben and Jerry’s ice-cream (now part of Unilever) were early B Corps. Some 2,500 have been certified in the past decade or so.

Ecology

Interesting facts taken from all articles in the group ‘ecology’:

  • Humans have had a profound impact on the prevalence of other species: the biomass of wild mammals has decreased to a sixth of its previous value. Meanwhile, the carbon count of domesticated poultry grew to three times higher than that of every species of wild bird combined.
  • Columbia BIO is a huge project to survey Columbia’s biological assets. The government’s aspiration is that biodiversity itself might be harnessed as an economic resource, and that this might contribute as much as 2.5% of Columbia’s GDP by 2030.
  • The Great Barrier Reef has died and then been reborn (with rising and falling sea levels) five times during the past 30,000 years. Bleaching is now threatening the reef for the sixth time. In the short term, global warming really does look like a serious threat.
  • Sudan, the last male northern white rhinoceros on Earth, died in March. He is survived by two females. IVF seems the last hope for the northern white rhino.
  • Around 40% of bee species globally are in decline or threatened with extinction. Beekeepers in North America and Europe are losing hives at an abnormally high rate. Why? Diana Cox-Foster, an entomologist, offers the theory of the four Ps: parasites, poor nutrition, pesticides and pathogens.

Environmental Laws

Interesting facts taken from all articles in the group ‘environmental laws’:

  • Since the 1970s enormous farms growing irrigated crops such as cotton and nuts spread across the Murray-Darling basin in Australia. Illegal extraction of water is a problem. Farmers are meant to use meters to monitor how much they pump. But last year, cotton irrigators were accused of tampering. Wide-scale abuse has been possible because states and local governments have failed to enforce the rules.
  • Shipping accounts for only around 2% of global carbon emissions, but is quite dirty. Burning heavy oil, the industry produces 13% of the world’s sulphur emissions and 15% of its nitrogen oxides. And by 2050 ships will be producing 17% of all carbon emissions if left unregulated.
  • The International Maritime Organisation agreed to halve the industry’s carbon emissions by 2050.
  • The Trump administration is committed to undoing the Clean Power Plan —which sought to reduce carbon-dioxide emissions from power plants by 32% from their levels in 2005 by 2030—before it comes into effect. Its new proposal, the Affordable Clean Energy (ACE) rule, is much less ambitious because it would let states decide their emissions-reductions targets (including having none at all). Its name is Orwellian. The EPA’s own analysis shows that retail electricity prices would be reduced by a mere 0.1%-0.2% by 2035—but that use of coal, a pollution-belching fuel, would shoot up by as much as 9.5%.

Please share my blog post with your networkEmail this to someone

email

Share on LinkedIn

Linkedin

Track the Most Important Planetary Boundary Yourself

Curbing climate change is arguably the most important non-financial topic your firm should be reporting efforts on; read here why (January 2018 post) and how (February 2018 post).

To push yourself to become familiar with the numbers for climate change, internalize the range where the world enters a zone of uncertainty, see the table below by the Stockholm Resilience Center (excerpt from a list with all their planetary boundaries):

Then see for yourself that we already crossed this boundary on the excellent CO2.earth website:

Do as I do, and bookmark their daily CO2 count in your web browser and follow CO2-count on a regular basis to internalize the parts-per-million concept of CO2 (on May 14 on 412 ‘parts per million parts in total in the atmosphere’. Here is a link to their daily count: https://www.co2.earth/daily-co2.

Please share my blog post with your networkEmail this to someone

email

Share on LinkedIn

Linkedin

Which ESG-Topics Should You Disclose Using The Economist as a Proxy?

Digging through the first four months of The Economist for relevant ESG-articles, I thought it would be nice to group the articles and see which groups get the most coverage in this highly regarded newspaper. My effort in the form of a Materiality Matrix is shown above, with the number of articles per topic on the Y-axis and the – debatable – impact on a firm’s profitability if this topic is not tackled by its management, on the X-axis. If The Economist can be used as a guide, the topics that should be covered by your organization are thus governance, green technology, pollution and climate change.

Some interesting snippets taken from the articles can be found below, grouped per topic. (Almost all quotes are adopted directly from The Economist).

Governance

  • Must read governance-article on women on boards: Skirting Boards
  • Norway introduced compulsory quotas requiring stockmarket-listed companies to give women at least 40% of their board seats.
  • In Belgium, Germany and France women make up 30-40% of board directors in large listed firms.
  • Quotas have done little to advance women further down the career ladder: in Britain, France, Germany and the Netherlands 80-90% of senior-management jobs are still held by men.

Green Tech

  • Oil firms Shell and Total plan to take on utilities in deregulated markets to provide electricity and gas direct to homes and businesses. They are toying with a strategy that could move their core business from oil to electricity. Must read article: From Mars to Venus
  • Solar cells made from perovskite (a compound of calcium, titanium and oxygen) are coming to the market and might drive silicon-based cells out of business. It’s early stages though.
  • Solar power gets a lot of attention but generates only 2% of the world’s electricity.
  • Microchip costs have fallen a million times faster than those of solar panels.
  • Solar suffers from “value deflation”: the more solar is installed, the less of the electricity that is produces in the middle of the day is needed. Unless it can be stored, the more costs it imposes on the rest of the system.
  • In an article on electrical vehicles, The Economist doubts if batteries will displace diesel in trucking anytime soon. Batteries have to replace part of the cargo and that makes it too pricey for a thin margin business.
  • To see how hard governments can push for renewable energy, look to South Australia: all coal-fired power stations have been closed, it gets 50% of its power from renewables and recently set a target of 75% renewables for 2025.

Pollution

  • Must read article on plastic pollution: Plastic Surgery
  • China is not only the world’s biggest emitter of carbon, but the world’s largest recycler, treating just over half of exported plastic waste. On January 1st China banned the import of 24 categories of waste, including household plastics.
  • China furthermore has taken a harder line and pressed on with pollution controls, hitting coalminers, cement-makers, paper mills, chemical factories, textile firms and more.
  • The European Union launched a “plastics strategy”, aiming, among other things, to make all plastic packaging recyclable by 2030 and raise the proportion that is recycled from 30% to 55% over the next seven years.
  • On current trends, by 2050 there could be more plastic in the world’s waters than fish, measured by weight.
  • Just 10% of 3.6m tonnes of solid waste discarded each day the world over is plastic. Whereas filthy air kills 7m people a year, nearly all of them in low- and middle-income countries, plastic pollution is not directly blamed for any.
  • Researchers have identified 400 species of animal whose members either ingested plastics or got entangled in it.
  • Trucost, a research arm of Standard & Poor’s, puts the overall social and environmental cost of plastic pollution at $139bn a year.
  • To put that into perspective, the United Nations Development Programme says that the costs of overfishing and fertiliser run-off amount to some $50bn and $200bn-800bn a year, respectively. By 2100 ocean acidification, which is caused by atmospheric carbon dioxide dissolving into water, could cost $1.2trn a year.

Climate Change

  • Must read article on including carbon pricing in decision making: Low-Carb Diet
  • Of the 6,100-odd firms which report climate-related data to CDP, a British watchdog, 607 now claim to use “internal carbon prices”.
  • Investors increasingly demand that companies take a carbon tax seriously.
  • The atmosphere contains two-and-a-half times as much of methane (a powerful greenhouse gas) as it did before the Industrial Revolution.
  • Methane emissions must be slashed. Several giants have made strides to limit fugitive emissions. If all the world’s gas producers attained BP’s leakage rate of 0.2%, instead of an industry average of over 2%, it would prevent 100m tonnes or so of methane from entering the atmosphere every year. This would spare Earth as much warming as cutting all the carbon dioxide emitted since the 19th century by one-sixth.
  • The X Prize Foundation awards companies that come up with carbon capture and storage techniques: Four of the finalists plan to produce sturdy building materials such as cinder blocks made from the slag left over from steel production, cured with carbon dioxide. Another four will fashion the gas into plastics or carbon-fibre composites. The remaining two have invented ways to turn the stuff into carbon monoxide or methanol, which are industrial raw materials.
  • Shipping and airlines were the only greenhouse-gas-emitting industries not mentioned in the 2016 Paris climate agreement.
  • Shipping produces 3% of the world’s greenhouse-gas emissions, similar to an economy the size of Germany’s. Lack of cleaner shipping technology is not a constraint. Zero-carbon fuels are becoming available. Slowing ships down by 10% could reduce fuel usage by almost a third. Diplomats argue that the slow progress is because their actions affect not just the shipping industry, but exporters too. If regulators move too aggressively they may reduce the competitiveness of seaborne trade.

This was a first attempt to a materiality matrix inspired by articles that appeared in the Economist in the first quadrimester of 2018. I hope to also create materiality matrices for the remaining quadrimesters of 2018.

Please share my blog post with your networkEmail this to someone

email

Share on LinkedIn

Linkedin

The Most Surprising Thing I Learned from Finishing a Climate Change Course

There’s a lot of good knowledge packed into the SDG Academy’s Climate Change course. You learn about the science behind climate change, what the Paris Agreement entails, and which multi-stakeholder initiatives try to combat climate change. The one thing that was maybe lacking was a chapter on how climate change poses threats to individual businesses; in the form of reputational risk, funding risk and any direct consequences of climate change. (For a comprehensive discussion of these risks, please refer to Climate Smart Business Decision-Making.) The biggest eye-opener for me, though, was the realization that most IPCC scenarios include a form of carbon capture to keep the planet well below 2°C warmer than pre-industrial levels.

It is time to start the debate on capturing carbon directly from the air, now that the price of capturing a ton of CO2 has fallen considerably. Of course, there are numerous arguments against capturing CO2, such as:

  • it promotes coal-fired energy plants;
  • it distracts from a move towards renewable energy;
  • there is little support for storing CO2;
  • it’s better to stop producing CO2 than to capture and store it.

But the most persuasive argument that I can think of in favor of capturing CO2 is the realization that most of the IPCC scenarios include it to be able to limit warming to 2°C. Add to that a growing number of jurisdictions that either implement a carbon tax or a cap and trade system (and a falling price for carbon capture), and you have a possible business case for companies to start capturing CO2.

Please share my blog post with your networkEmail this to someone

email

Share on LinkedIn

Linkedin

Five Ways to Introduce Climate Smart Business Decision-Making

 

Source: COSO and WBCSD, based on risk assessment World Economic Forum

 

As a follow-up on last month’s post on business risk stemming from climate change, this post shows you how to incorporate thinking on climate change in your business processes and decisions. The list of ideas is by no means intended to be exhaustive, but it contains a number of ideas I stumbled on while following the excellent Climate Action course by the Sustainable Development Solutions Network of the United Nations.

1.   Include climate change risk in Enterprise Risk Management (ERM)

Now that climate change risks in particular – and ESG-risk in general – are increasingly becoming mainstream for the business community, the calls to integrate these risks in existing frameworks are getting louder. The survival of your business may be at risk according to the WBCSD (World Business Council of Sustainable Development):

Businesses are facing an evolving landscape of emerging environmental, social and governance (ESG)-related risks that can impact a company’s profitability, success or even survival.

The leading organization for ERM, or Enterprise Risk Management, COSO, has teamed up with the WBCSD to update the COSO-framework with ESG-related risks. This is as much proof as you will ever need to convince your fellow management team members that it’s time to start integrating ESG-risk in your business processes. The joined COSO-WBCSD team published an executive summary on how to best integrate ESG-risk into an existing ERM framework. High-level steps include:

  • Establish governance for effective (ESG) risk management.
  • Understand the business context and strategy.
  • Identify ESG-related risks.
  • Assess and prioritize ESG-related risks.
  • Respond to ESG-related risks.
  • Review and revise ESG-related risks.
  • Communicate and report ESG-related risks.

Please note that all actual mitigation strategies, such as moving production locations, switching to different raw materials and preparing for extreme weather, are the outcomes of your risk management process. In other words, by updating your ERM with climate (and other ESG) risks, you lay the groundwork to be able to mitigate those risks. For more on risk mitigation for the different risk categories stemming from climate change, see last month’s post.

2.   Disclose climate change related risk using an existing framework

The Task Force on Climate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg, is rapidly emerging as the standard for core elements and recommendations to report on climate-related financial risk. The task force is part of the international Financial Stability Board, and the TCFD principles are backed by some of the leading firms in the world, such as ABN AMRO, Akzo Nobel, BlackRock, Coca-Cola, KPMG, Olam, Philips, Shell, Suez, Tata, Tesco and Unilever.

The recommendations of the TCFD revolve around a number of key features:

  • Adoptable by all organizations.
  • Included in financial filings.
  • Designed to solicit decision-useful, forward-looking information on financial impacts.
  • Strong focus on risks and opportunities related to transition to a lower-carbon economy.

Core elements of climate-related financial disclosures, as drafted by the TCFD, are:

  • Governance. The organization’s governance around climate-related risks and opportunities.
  • Strategy. The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
  • Risk Management. The processes used by the organization to identify, assess, and manage climate-related risks.
  • Metrics and Targets. The metrics and targets used to assess and manage relevant climate-related risks and opportunities.

While the COSO-WBCSD recommendations on risk management mainly focus on internal risk management for the company itself, the TCFD recommendations should be taken to heart because it tells your company what your external stakeholders are seeking in terms of climate related disclosures. It is advisable to use an existing framework for your disclosures (e.g. GRI or IIRC) and, as an add-on for the climate related disclosures, make sure you integrate the TFCD’s recommendations to make it more relevant for your stakeholders.

3.   Use internal or shadow price for carbon in business decision

The mitigation strategy to prepare for a world where there’s either an emissions trading system (ETS) for carbon or a carbon tax, is using an internal (or shadow) price for carbon. An internal price puts a monetary value on all of your carbon emissions (or indeed on all GHG emissions), which you then use in investment decisions. The idea is that this helps your company prepare for times when policies are put into place that restrict or tax your carbon or GHG emissions. In the post on climate change risk, a number of big firm are mentioned that already adopted this practice. Among them are Microsoft, DSM, AkzoNobel, Carrefour and Sainsbury’s. How this works is revealed by The Economist in a recent article titled Low-carb diet:

Investors increasingly demand that companies take that possibility [of carbon taxes] seriously – 81 countries mention a carbon cost in their national pledges to limit global warming under the Paris climate agreement of 2015. Plenty of the Paris promises remain just that for now, but bosses ignore them at their peril, cautions Feike Sijbesma, who co-chairs the Carbon Pricing Leadership Coalition, which groups green-minded governments and business under auspices of the World Bank. In his day job as chief executive of Royal DSM, Mr Sijbesma has made the Dutch food producer examine all proposed ventures to check whether the sums still add up if a ton of carbon dioxide cost €50, well above the going rate of €6 or so in the European Union’s emissions-trading system (..). Where they do not, alternative feedstocks or cleaner energy suppliers must be found. If a project still looks unprofitable, it could be discarded altogether.

A third way to introduce climate change thinking in your business decisions would therefore be to adopt internal GHG prices into your investment and operational decisions.

4.   Join industry initiatives

Setting public goals, and reporting against those goals, might be one of the most powerful communication tools towards your stakeholders. If you want even more credibility, you can opt for tying these goals to science-based measures or work together with other companies in industry initiatives. The last option gives you the obvious advantage of learning from others, and you thus do not have to re-invent the wheel. Credible industry initiatives engage with important NGOs, think tanks and research organizations to set climate or sustainability related targets and implementation plans. Thus, proactive membership gives you an invaluable ‘line of defense’ in the sense that your company can always refer to the industry initiative to explain the decisions taken on action plans, goals or metrics used. This blog post is obviously not the place to give an exhaustive list of all industry initiatives for mitigating climate change. However, as an example, the WBCSD is (again) a good place to start:

  • Through the Rescale project, leading energy and technology companies are working together on solutions to accelerate the deployment of renewables and the transition to a low-carbon electricity system. Companies that signed up to the Rescale project are, among others, Unilever, Nestlé, DSM, Enel and ABB.
  • Sustainable fuels. The below50 project works towards sustainable fuels that emit at least 50% less as compared to traditional fuels. Some of the organizations involved are United Airlines, Audi, UPS, Arcelor Mittal and the Port of Rotterdam.
  • Climate Smart Agriculture. Through the three pillars of Climate Smart Agriculture (productivity, resilience and mitigation), this initiative is contributing to increasing the resilience and productivity of farmers in our food system to make 50% more food available and strengthen the climate resilience of farming communities, whilst reducing agricultural and land-use change emissions from agriculture by at least 50% by 2030 and 65% by 2050. Major names that signed up are Starbucks, Walmart, FrieslandCampina, Olam, Pepsico and Kellogg’s.

More of these initiatives under the auspices of the WBCSD exist (i.e. for the cement, freight, chemicals, buildings and forest products industries), and importantly, your organization might be more effective by joining an industry initiative with an agreed upon implementation plan, than creating climate strategies from scratch.

5.   Follow the debate(s) on climate change

A lot is written on climate change. There is still a lot of controversy over climate change, though we leave climate change naysayers in the same category as people who deny the link between smoking and lung cancer.  One of the main points of controversy that you may not yet heard of, is literally the sucking of carbon out of the air. This is one of the lesser known, but needed, strategies to reduce CO2 particles in the atmosphere according to The Economist:

Fully 101 of the 116 models the Intergovernmental Panel on Climate Change uses to chart what lies ahead assume that carbon will be taken out of the air in order for the world to have a good chance of meeting the 2°C target.

There are many arguments put forward by the opponents of carbon capture (different technologies exist: carbon capture and storage (CCS), carbon capture and utilization (CCU), bio-energy with carbon capture and storage (BECCS)), but the reality is the IPCC argues that we need a fair amount of it if we want to have a chance of living in an under 2°C world. Without taking a position here (just check the articles with the tag ‘slippery slope argument’ for some thoughts on that), it’s advisable to follow debates such as the one on carbon capture. It will raise awareness of the different viewpoints and from which angles your firm can expect criticism once you opt for a certain climate mitigation strategy (e.g. carbon capture). Maybe not so much a direct pathway to integrate climate change into your business processes, but by following the debates on climate change and disseminating information in your management’s risk meetings, you will create awareness of the controversies about mitigation strategies and, in turn, you will create a platform for further discussion.

By way of conclusion

From last month’s blog we’ve learned that climate change poses risks for your business, and how you can mitigate those risks. In this post, five ways for introducing climate change in your business lexicon have been put forward:

  • update risk management with climate risks;
  • disclose climate risks;
  • use internal carbon prices;
  • join industry efforts;
  • follow the climate change debates.

By adopting these strategies, climate change risks will be more easily identified and, in turn, more creative thinking on mitigation strategies in your organization will take hold.

Please share my blog post with your networkEmail this to someone

email

Share on LinkedIn

Linkedin

Could You Be Wrong in Thinking Climate Change Does Not Affect Your Business?

Credit: Takver via Flickr

Introduction: what The Economist has to say about climate change and business

More than a year ago, we started off a series of blog posts on mandatory non-financial disclosures with a post on climate change. At that point, four risk groups of climate change were identified and suggestions were made on how to integrate climate risks in your overall risk management strategy. It is time to revisit and update the story on climate change, as climate science is advancing and impacts are becoming clearer.

As a heuristic (always a good idea, see this post), we gathered that the number of times The Economist, a weekly current events newspaper, wrote an article on ESG-related topics (i.e. risks stemming from environmental, social or governance aspects) would be a proxy for how serious firms should take ESG-risks. Climate change was the topic of the most articles by far in the period from roughly the end of 2015 to the end of 2017. We counted the following number of articles on ESG-topics:

  • Climate change: 38 articles.
  • Renewable energy: 18 articles.
  • ESG-risks: 12 articles.
  • Natural resource depletion and pollution: 11 articles.

Here’s how we think these topics fit together:

Please note we don’t claim any scientifically established causal relationships here; just a framework to put different topics loosely together and offer a way to think about interrelations. If you are looking for a scientific take on this, please visit the excellent report A Guide to SDG Interaction: from Science to Implementation from the International Council for Science.

Since climate change as a topic has the highest count in articles, is central to other topics such as the worldwide push for renewables and natural resource depletion (see schematic above), and climate change is advancing rapidly, we felt it was time to update our previous post on climate change risk. The importance of climate change risk is echoed by The Economist:

Ignoring the climate issues altogether looks like the biggest risk of all.

We will therefore revisit the four business risks already identified earlier (i.e. asset and infrastructure risk, yield and price risk, regulatory risk and reputational risk), and will propose a number of new risk groups that we found by reading recent articles by The Economist on ESG-topics.

Climate change and business risk, updated

In the table below, you will find all the business risks stemming from climate change found in The Economist. New risks (compared to our earlier blog post) are shown in bold italics. First, there are two additional business risks added to the risk group ‘external stakeholder actions to curb climate change’. Second, we found an entirely new risk group: ‘funding risk’.

For every business risk identified, we will now briefly describe the risk, give the examples found in The Economist, and offer a way to mitigate the risk.

Regulatory risk. More and more jurisdictions are introducing cap and trade schemes or carbon taxes. This inevitably means that firms have to take into account (future) carbon prices in investment decisions. According to the Carbon Pricing Leadership Coalition (a World Bank funded outfit that puts together business and governments to advance carbon pricing), ‘as of 2017, 42 national and 25 subnational jurisdictions are pricing carbon’. That already accounts for more than 20% of global CO2 emissions. In Canada, the announcement of a national carbon price puts high emitters at immediate risk. The province of Quebec in Canada, for instance, is lobbying to funnel $1 billion to Bombardier, an aircraft-maker, to make up for its payments of carbon taxes under a nationwide introduction of a carbon tax. Even if your own government is not imposing a carbon tax, there is increased risk that other governments start installing an import tax for every ton of CO2 emission in the making of a product. Indian steel makers, for example, will have to take into account a carbon tax when exporting to the EU, even though they do not currently face a carbon tax in India. What to do? More and more firms are using a price for carbon emitted in their long-term investment decisions. Putting a price on carbon in decision-making – and using a realistic price, say in the range of €50-60 per ton – will take into account any future carbon tax or cap and trade system. The Economist lists a number of companies that already use such internal carbon prices: Microsoft, DSM, AkzoNobel, Indian cement manufacturers ACC, Ambuja & Dalmia, French building materials producer Saint-Gobain, and supermarket chains Carrefour and Sainsbury’s.

Reputation risk. The sectors that face reputational risk include an obvious one and a, maybe, not so obvious one. To start with the obvious sector, the fossil fuel industry, it is not only CO2 emissions that are the target of environmentalists, but also methane leaks. That leaves companies like Shell, BP and ENI vulnerable to reputational risk even if they pledge to switch more and more to natural gas (infamous for methane leaks). Already, NGOs such as the Environmental Defence Fund are drawing attention to methane emissions in the production of natural gas that ‘now surpasses cow burps as a source of [methane] emissions’ according to The Economist. A sector that, as of yet, has not attracted the attention of environmental campaigners, is the cement industry. That might be about to change however, as more and more NGOs draw attention to an increasing number of industries now that it becomes clear that humanity is unlikely to keep temperatures less than 2°C warmer than pre-industrial times. Cement, together with steel, makes up a large part of the CO2 footprint for any building. And as firms try to lower their CO2 footprint, buildings, and thus cement, is another link in the chain in trying to reduce emissions. Firms that are exposed to this type of risk (i.e. reputational) are, according to The Economist, especially the major players in the cement industry, e.g. Heidelberg Cement Group and Cemex. Examples for mitigating these risks, as listed by the same newspaper, include setting publicly available targets (and reporting against those targets), carbon capture and storage, and using higher internal carbon prices for long-term investment decisions.

Shareholder pressure. An unlikely pressure group that turns its attention to climate change, are shareholders. Unlike environmental groups, who strive for direct reduction in emissions, shareholders would like to see that companies identify the impact of climate change regulations and policies on business plans. Again, the industry where shareholders are, at the moment, most active is the fossil fuel industry. The Economist refers to Shell, Total, Chevron and Exxon as firms where shareholders are particularly active to push towards pricing in carbon in investment decisions as the preferred mitigation strategy. Total goes further: ‘It plans to set out its ambition to develop an energy mix by 2035 consistent with Paris-style global-warming limits, including a pledge to invest $500m a year in renewables, and a “symbolic objective” to raise their share to 20% of its portfolio, from 3%. In an effort to complement its acquisition of a solar-energy company, it launched an offer to acquire a battery-maker, which will bolster its expertise in electricity storage’. Hidden in this mixture of Total’s plans, are a plethora of mitigation strategies that would please many shareholders pushing for just that: increasing the stake in renewable energy, taking head of broad international movements like the Paris agreements and adjusting strategies accordingly, and setting publicly available targets. Do this, and add to the mix internal carbon prices for investment decisions, and your firm will have a good policy mix to satisfy shareholder demands.

Lawsuit risk. In an article dubbed ‘Lawsuits against climate change’, The Economist points out that the number of lawsuits where the negative effects of carbon emissions are central, are rising. The targets are both governments and big energy firms. Ironically, governments also sue energy firms: San Francisco is taking BP, Chevron, Exxon and Shell to court. All of this is made possible by improved climate science: ‘Scientists are increasingly confident that they know roughly what shares of the greenhouse gases in the atmosphere were emitted by individual countries, and even by the biggest corporate polluters. (..) just 90 belched out 63% of all greenhouse gases between 1751 and 2010.’ In a fascinating report by the Carbon Majors Database, all these companies are listed. Unsurprisingly, the 90 firms are either big energy firms, mining corporations, or cement manufacturers. Even if your firm is not listed, you might want to check if a similar study is done for your own country, and you may find that your company is listed in that ranking. Climate litigation is on the rise. The focus is on big energy firms for now, but cement manufacturers and mining corporations might be next. The sooner you map your firm’s GHG emissions and estimate the risk that an interest group or government targets you in the near future, the better.

Decreased access to capital markets. The last new risk that we identified as compared to our last post on climate related risk for companies, is a funding risk. As climate change becomes more of an issue, investor demand for green bonds is increasing. At the same time, investors are backing away from industries that run greater risk from climate change (these risks are, essentially, all other risks described here). Moody’s, a rating agency, puts energy firms and car makers, for example, in a higher risk category. This can obviously translate in lower stock prices and higher premiums in bond markets. Big investors are adopting climate strategies rapidly. Allianz, for example, is not putting money in firms that derive more than 30% of their energy from coal; and even the biggest asset management firms like BlackRock have set-up dedicated green-bond funds fueled by investor demand. Another recent development is that rating agencies are threatening cities with downgrades if they don’t do more on climate change mitigation (also see asset and infrastructure risk below). Companies might well be next.

Asset and infrastructure risk. As 2017 proved, with hurricanes Harvey and Irma as horrifying examples, climate change increasingly poses a threat for assets and infrastructure. As wet places get wetter and stormy places get stormier, cities around the world are making plans to raise roads and improve drainages. Your business would be well advised to do the same. As an example, you could use impact models (such as the Inter-Sectoral Impact Model Intercomparison Project (ISI-MIP)) to establish which of your business locations are at risk, and implement a mitigation strategy for those locations accordingly. We could not find any specific examples in The Economist of businesses that have already implemented mitigation strategies for asset and infrastructure risk, however. It mainly refers to cities and governments to take action to protect assets and infrastructure. Your firm should follow the example of cities.

Price and yield risk. What we discussed for asset and infrastructure risk, more or less also holds for price and yield risk. Although The Economist acknowledges the risk (‘by 2050, even if temperature rise is successfully limited to 2°C, crop yields could slump by a fifth’), we could not find any mention of individual firms that are already affected by this. Again, this should not be a reason for a wait-and-see attitude. A good starting point is the Agricultural Model Intercomparison and Improvement Project (AgMIP). This major international collaborative is an effort to improve agricultural simulation and to understand climate impacts on the agricultural sector at global and regional scales. AgMIP produce highly useful maps for your businesses to gauge the impact of climate change on yields for crops in your supply chain.

Industry climate change risk profile

Reading through the business risks in the previous section, you will have been able to quickly assess if your firm faces a particular risk or not. By deconstructing climate change risk into seven distinct business risks (i.e. regulatory, reputational, shareholder pressure, lawsuit, funding, asset & infrastructure, and price & yield), you now have a tool to help you decide if the – arguably – abstract concept of climate change is relevant to your organization.

By way of summary, we have added specific industries (mentioned in The Economist articles that we consulted) to the individual business risks identified. This isn’t to say that other industries aren’t impacted by each type of business risk. See the table below:

Coming up with the right strategy mix to mitigate these risks might not be easy. Renewable energy, insurance policies, carbon capture and storage, (higher) internal carbon prices, improving drainages, moving production locations: they could all be visited as possible solutions. Keep in mind that the combination ‘climate change’ and ‘business’ does not feel like a realistic combination. We would argue that this is normal human behavior, since climate change is not a risk that has hurt your business in the past. But we hope to have shown with examples taken directly from The Economist, that your competitors and fellow business organizations are already fully taking on business risks stemming from climate change. A final word of caution from Nicholas Taleb:

People in risk management only consider risky things that have hurt them in the past (given their focus on ‘evidence’), not realizing that, in the past, before these events took place, these occurrences that hurt them severely were completely without precedent, escaping standards.

Please share my blog post with your networkEmail this to someone

email

Share on LinkedIn

Linkedin

What every manager should know about (1/5): Climate Change

before-the-flood

As your organization is getting ready for the implementation of EU guideline 2014/95/EU on the disclosure of non-financial information, I hand you a series of blog posts on non-financial topics that business managers might be less familiar with. My aim for this series of posts is twofold. First, to give you insight into concepts that are integral to non-financial frameworks on reporting, such as the Global Reporting Initiative (GRI) framework. Second, to show why and how you should integrate these specific non-financial disclosures into your overall risk management strategy.

The first blog in this series will discuss what climate change is and what climate change has to do with managing business risk. If you are in need of a broader perspective on climate change I recommend Leonardo DiCaprio’s clear and informative film Before the Flood.

Defining Climate Change

Climate Change, according to the Concise Oxford English Dictionary is:

The change in global climate patterns apparent from the mid to late 20th century onwards, attributed largely to the increased levels of atmospheric carbon dioxide produced by the use of fossil fuels.

In his insightful book Climate Change, A Very Short Introduction, Mark Maslin writes:

Over the last 150 years, significant changes in climate have been recorded, which are markedly different from the last at least 2,000 years. These changes include a 0.85°C increase in average global temperatures, sea-level rise of over 20 cm, significant shifts in the seasonality and intensities of precipitation, changing weather patterns, and the significant retreat of Arctic sea ice and nearly all continental glaciers. (…) The IPCC [Intergovernmental Panel on Climate Change] 2013 report states that the evidence for climate change is unequivocal and there is very high confidence that this warming is due to human emissions of GHGs [i.e. greenhouse gases, such as CO2].

To be able to visualize why it’s so hard to combat climate change caused by CO2, consider this illuminating analogy from Climate Shock, by Gernot Wagner and Martin Weitzman:

Think of the atmosphere as a giant bathtub. There’s a faucet – emissions from human activity – and a drain – the planet’s ability to absorb that pollution. For most of human’s civilization and hundreds of thousands of years before, the inflow and the outflow were in relative balance. Then humans started burning coal and turned on the faucet far beyond what the drain could handle. (…) Inflow and outflow need to be in balance, and that won’t happen (…) unless the inflow goes down by a lot.

Recently, we have learned (see a recent Guardian article) that the amount of CO2 in the atmosphere reached 400 parts per million (ppm); that’s 40% higher than pre-industrial levels (280 ppm). In Climate Shock we read why this is a serious problem:

Last time concentrations of carbon dioxide were as high as they are today, at 400 parts per million (ppm), the geological clock read “Pliocene”. That was over three million years ago, when natural variations, not cars and factories, were responsible for the extra carbon in the air. Global average temperatures were around 1-2.5°C (…) warmer than today, sea levels were up to 20 meters (…) higher, and camels lived in Canada.

The conclusion that we must draw from this is not that climate change is new. Rather, for the first time in the earth’s history, climate change is manmade and happens at a rate which would make it impossible for us to re-actively adapt our infrastructure accordingly. Think for example of shifting entire agricultural regions, or moving complete cities from their present-day ocean front locations.

For an illustrated (and witty) example of how extraordinary the current spike in average temperature really is, see A Timeline of Earth’s Average Temperature. Below, only the very last brief time period – with a sharp increase in average temperature – is shown; the full infographic shows much slower changing average temperatures in the last 20,000 years.

temperature

Skepticism towards climate change is like denying smoking causes cancer

Perhaps most of the general public would not see climate change as an urgent problem, as Wagner and Weitzman point out in Climate Shock.  Although the science behind climate change is solid and has been accepted by the scientific community on the weight of evidence of the research, there seems to be an amazing amount of skepticism around the subject in non-science circles. In trying to explain this phenomenon, Maslin writes:

…the media’s ethical commitment to balanced reporting may unwittingly provide unwarranted attention to critical views, even if they are marginal and outside the realm of what is normally considered ‘good’ science. (…) Add to this the greater ease of communication, from conventional media, such as newspapers, radio, and television, to more informal blogs, tweets, etc. Normal private debate among scientists and experts can easily be shifted into the public arena and anyone, what ever their level of expertise, can voice an opinion and feel it is as valid as that of experts who have dedicated their whole lives to studying areas of science. Overall, this contributes to a public impression that the science of climate change is ‘contested’, despite what many would argue is an overwhelmingly scientific case that climate change is occurring and human activity is a main driver of this change.’

Or, maybe skepticism has to do with cognitive dissonance (i.e. a state of inconsistent thought, beliefs, or attitudes), write Wagner and Weitzman:

Whenever science points to the very real potential of these types of catastrophic outcomes, cognitive dissonance kicks in. Facts might be facts, the reasoning goes, but throwing too many of them at you at once will all but guarantee that you will dismiss them out of hand. It just feels like it can’t be true.

Leonardo DiCaprio in Before the Flood echoes this:

We keep being inundated with catastrophic news about the environment every single day, and the problem seems to get worse and worse. Try to have a conversation with anyone about climate change, and people just tune out.

The key point here is that the efforts to understand climate change are a scientific effort. Maslin rightfully states that ‘science is no belief system’. As Armand Marie Leroi points out in his book, this has been true ever since Aristotle invented science:

‘A scientist is someone who seeks, by systematic investigation, to understand experienced reality.’

Being skeptical towards climate change is therefore the same is being skeptical towards the process of scientific discovery itself. It is, Maslin states, to ‘deny that smoking causes cancer, or that HIV causes AIDS’.

Climate Change and business risk management

Integral risk management for your organization should include climate change risks. As the authors of Climate Shock put it: ‘First and foremost, climate change is a risk management problem’.  A risk analysis of climate change would lead to defining business risks that stem from both the direct consequences of climate change (like more severe weather events), and risks that stem from external stakeholders’ actions to curb climate change that, in turn, have an effect on the company’s operations or profitability (e.g. tighter regulations for GHG emissions). Without making any claims of exhaustiveness, as a minimum, your organization’s risk assessment should include the following risks in a risk assessment:

risk-matrix

Asset and infrastructure risk. We already see an increase in extreme weather events that could hurt a firm’s assets and supply chains. In Climate Change, A Very Short Introduction, numerous relevant examples are given:

[I]n recent years massive storms and subsequent floods have hit China, Italy, England, Korea, Bangladesh, Venezuela, and Mozambique. In England in 2000, 2007, and 2013/13, floods and storms classified as ‘once-in-200-years events’ have occurred within 13 years and frequently within a single year. Moreover, in Britain the winter of 2013/14 was the wettest six months since records began in the 18th century, while August 2008 was the wettest on record.

Organizations could use climate forecasting models to show which assets and infrastructure are more at risk because of climate change. A next step would be to develop scenarios that would lessen the impacts on your assets and supply chains (e.g. moving operations to areas less affected by extreme weather events).

Yield and price risk. When climate change starts to affect crop yields, it will also affect purchasing prices. The IPCC (Intergovernmental Panel on Climate Change) brings together key climate research conducted all over the world and provides a consensus of this research. The IPCC, 2014 report found:

Based on many studies covering a wide range of regions and crops, negative impacts of climate change on crop yields have been more common than positive impacts. [S]everal periods of rapid food and cereal price increases following climate extremes in key producing regions indicate a sensitivity of current markets to climate extremes (…).

Your organization should know which commodities are most at risk from the impacts of climate change. This should be a starting point for developing scenarios to mitigate yield and price risks.

Government regulations. Now that the Paris Agreement has come into force, we can see governments stepping up their work to implement policies that will make sure global average temperatures well below 2°C. Barack Obama in The Economist:

[S]ustainable economic growth requires addressing climate change. Over the past five years, the notion of a trade-off between increasing growth and reducing emissions has been put to rest. America has cut energy-sector emissions by 6%, even as our economy has grown by 11%. Progress in America also helped catalyse the historic Paris climate agreement, which presents the best opportunity to save the planet for future generations.

Any policy changes that try to curb climate change will impact business-as-usual. As a mitigation strategy, organizations should try to understand possible policy options and work out the effects on operations and profitability.

Reputation risk. Awareness of climate change in general is on the rise. Whenever the public is of the opinion that the firm’s activities are harmful (this obviously extends beyond climate change), there’s a probability that profitability is at risk. For example, the big palm oil trader IOI was accused of illegal logging recently  ̶  contributing directly to climate change because of loss of rain forest that stores CO2  ̶  , experienced extreme negative publicity (see this article in the Financial Times), and saw share prices and revenues tumbling. As a first step in creating mitigation scenarios, firms should make an effort in understanding external stakeholder’s views and wishes towards the firm’s climate change actions. As the IOI example shows, reputation risk does not only revolve around emissions but also around having supply chains that contribute towards climate change by deforestation (e.g. beef, soy, palm oil, and wood fiber). Your organization should therefore not only know which operations are most at risk from the impacts of climate change (direct risks), but should also know which commodities contribute the most towards climate change (reputation and regulatory risk).

As I already argued in my blog post The Business Case for Non-Financial Reporting, disclosing non-financial information can lead to insights on how to update your business strategy or improve stakeholder relations. Reporting on climate change gives you the opportunity to update your risk management framework. By breaking climate risks down into direct and external stakeholder risks, and putting in place mitigation scenarios, your organization will be well prepared for an age where climate change is at the top of the agenda.

Please share my blog post with your networkEmail this to someone

email

Share on LinkedIn

Linkedin