In September 2015, Mark Carney, governor of the Bank of England, gave a speech at Lloyd’s of London warning about the dangers of climate change. He described climate change as “the tragedy of the horizon” and outlined in detail the very real human, environmental, economic, and financial costs if we fail to understand climate risk and delay preparing strategies for resilience. In seeking to persuade his audience, he said, “The more we invest with foresight, the less we will regret in hindsight.” In short, a holistic understanding of climate risk and resilience must become a key aspect of business strategy, from inside the business all the way up and down the supply chain.
Carney’s warnings have seemed very real in recent months. July 2016 was the hottest month ever recorded, the six-month period from January to June was the planet’s warmest half year on record, and 2016 is on course to be the hottest year, resulting in power blackouts, severe droughts, and destructive wildfires. Also in July, NASA’s Goddard Institute for Space Studies in New York revealed that two key climate change indicators—global surface temperatures and Arctic sea ice extent—have broken numerous records through the first half of 2016.
Climate change is a key risk deserving business attention, strategy, and action. It is the highest-impact risk to business, according to the World Economic Forum’s 2016 Global Risk Assessment Report, and presents major implications both inside individual companies and across the full supply chain. Key business functions including operations, finance, infrastructure, procurement, human resources, marketing and sales, and strategy can be undermined by the impacts of climate change. Moreover, climate risk affects every step of the supply chain from raw materials extraction, through manufacturing and logistics, and all the way to consumer distribution.
And yet, it is clear that action to build companies’ resilience to climate risk is falling short. Our analysis of global supply chains and climate change revealed 72 percent of suppliers believe climate risks could significantly affect their business operations, revenue, or expenditure, but only half of them are currently managing this risk.
The perception of climate risk is also flawed. Companies often understand climate risk as the exposure of operations to a physical hazard (such as an extreme weather event, flood, drought, or sea-level rise). As a result, their strategies for resilience have typically focused on building infrastructure to withstand physical hazards and protect core operations. This overlooks the importance of vulnerability assessments in any effective understanding of risk. Similarly, companies have focused on their own operations when determining material risks, which means they have underestimated risks across the supply chain. And finally, companies have underestimated their capacity to build resilience through their innovations, products, and services and are therefore missing out on opportunities to demonstrate leadership, gain reputational value, and grow their business.
Essentially, companies have been using a one-dimensional approach to tackle a three-dimensional problem. This limited view fails to account for the broad range of climate impacts on companies and can skew risk assessments—creating false alarm in an area where a company may be relatively secure, or completely missing important vulnerabilities. For example, experts say climate change could significantly decrease the production of coffee beans in key growing areas (and many other staple crops across the globe). As a leading company responding to this climate risk, Starbucks is looking beyond its direct operations and helping suppliers enhance their climate resilience through alternative, but innovative, growing methods. Companies should replicate this holistic approach to climate resilience, which will create the climate-resilient businesses of the future.
To help companies address this challenge, BSR’s Resilience and Adaptation Initiative (READI) will build collaboration among companies and leading adaptation experts. In the coming years, we will work to equip business with a greater understanding of climate risk and actionable methods for greater climate resilience inside companies, across supply chains, and within vulnerable communities. Recognizing that climate risk is unique across industries, we will work to create an actionable, three-dimensional strategy framework for resilience. This approach will arm companies with the foresight they need to ensure continuity and growth, avoid cascading risks across the supply chain, and build or support broader societal resilience.
Business success requires constant attention to the fundamentals: products that meet consumers’ evolving demands, competitive pricing, focused marketing, cash flow management, and a talented team to lead the company’s innovation forward. Increasingly, we understand that companies must also proactively calibrate corporate strategy for climate risk because the ability to perceive of, and respond to, these risks can mean the difference between success and struggle. And so, in this record-breaking year, it’s time for companies to add climate risk and resilience to the fundamentals.