By Anna Haworth
A new study, published this week in the journal Nature Climate Change, analysed disclosures from more than 1,600 global companies and found that many companies are failing to accurately characterise their climate change risk or adequately prepare for its physical impacts.
The study, authored by Conservation International and CDP, was based on responses to CDP’s annual climate change questionnaire, which asks companies to report on climate risk management strategies. The study represents the first comprehensive analysis of climate risk reporting across multiple industries and sectors of the global economy.
Companies are recognising and reporting physical climate risks – from droughts, floods, cyclones, and changes in precipitation patterns and in average and extreme temperatures. Two-thirds of risks identified were viewed by companies as ‘more likely than not’ or ‘virtually certain’ to occur, and more than half of companies said that they expect climate change to increase their costs or disrupt production capacity.
Company strategies for managing the impacts of climate change were sorted by the researchers into three categories: ‘soft’ strategies, such as conducting risk assessments and updating emergency response plans; ‘hard’ approaches that involve capital investments in technology or infrastructure, such as flood control and air conditioning; and ecosystem-based adaptation, such as grasslands restoration, sustainable agriculture and forestry, or conservation of coastal ecosystems.
The most common approach to climate change, employed by 39% of companies, involves a mixture of soft and hard strategies. One third of companies use soft strategies only. Notably, 18% of companies did not disclose any adaptation strategy for the physical climate risk identified.
The researchers state that “companies’ disclosures on climate risk reveal a preference for incremental or reactive adaptation strategies.” Companies are retaining the language of risk management and “too often translate the complex challenge of climate change into solutions that align with business-as-usual practices.”
The study finds that while many companies are trying to incorporate climate change into their risk management practices, five key ‘blind spots’ are preventing businesses from adequately preparing for its impacts:
- The magnitude and costs of physical climate change risks. Of the companies surveyed, which represent 69% of global market capitalisation, they are collectively underreporting climate risks to investors by at least 100 times. This reflects the fact that a large number of companies do not report financial impacts and those that do, are probably underestimating them.
- Climate change risks and adaptation strategies ‘beyond the fenceline’. Despite evidence that climate change will have wide-ranging impacts for businesses, most companies have focused their adaptation strategies on a small set of impacts to direct operations, not taking into account supply chain, customer, employee, and wider societal impacts.
- The potential for Ecosystem-based Adaptation (EbA). The huge win-win potential of ecosystem conservation, restoration and sustainable management, to both reduce the physical impacts of climate change and deliver other co-benefits, is largely being ignored.
- The costs of adaptation. Only a limited number of companies are reporting the up-front cost of climate change adaptation measures. These are largely framed in terms of ‘management costs’, which do not necessarily represent additional expenditures on adaptation. Few companies are calculating the return on investment, the relative cost effectiveness of different strategies, or the cost of doing nothing. The near-absence of these cost comparisons limits investors’ ability to understand or assess the strategy against available alternatives.
- Nonlinear climate risks and the need for radical change. Most corporate adaptation strategies assume that climate change risk is basically linear. But science increasingly suggests the existence of ‘tipping points’ – such as sudden permafrost thaw, ice sheet loss, or Amazon forest die-back – that could lead to more abrupt changes and severe risks to businesses and society as a whole. The authors conclude that “radical adaptation for radical change, it seems, is not yet part of the business agenda.”
The study closes on a more positive note, stating that these barriers to improved disclosure and ultimately better climate change adaptation strategies are not insurmountable. The authors highlight that corporate governance structures matter for climate change reporting. Furthermore, mandatory reporting requirements and standardised performance indicators would facilitate more transparent and robust reporting. The 2017 Task Force on Climate-related Financial Disclosures (TCFD) recommendations has provided impetus for companies to report the financial implications of climate risks and many companies are now reporting in-line with these recommendations. In 2018, CDP has also aligned its reporting with the TCFD recommendations, meaning that companies can more clearly communicate their risks and management approaches to their investors and customers. Finally, in cases where adaptation action offers benefits for multiple actors and become ‘public goods’, new partnership models may be required to enable costs to be shared, both with other companies and with governments.