Acclimatise and Asia-Pacific’s largest law firm, Minter Ellison, are pleased to launch new guidance to assist Non-Executive Directors (NEDs) exercise oversight of corporate action on physical climate risk management. This guidance, prepared for the global Directors’ climate forum, Chapter Zero, brings leading physical risk and legal expertise to bear on an issue that represents one of – if not the – key challenge facing corporates today: How can business build resilience and thrive in the context of a changing climate?
The physical impacts of a changing climate are impacting businesses today, modifying a suite of risks that may previously have been viewed to be managed. These impacts – which are affecting firms, their key stakeholders and supply chains, and customers – risk undermining the foundations of corporate value (including reputation value) and placing constraints on the accomplishment of strategic objectives. Critically, these risks are becoming translated into foreseeable material financial risks and liability risks.
At the same time, investor, insurer and regulatory expectations are increasing, with the disclosures aligned with the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) on a course to becoming mandatory in several jurisdictions.
The real physical risks facing firms and the evolving regulatory landscape both create growing urgency on the need for corporates to understand, assess and disclose physical-related climate risks and opportunities. In their oversight capacity, NEDs have a unique and powerful role to play in driving Board-level action on climate risk. By being prepared with key facts and probing questions, NEDs can help improve Board accountability and ensure that key – potentially overlooked – issues are being addressed.
This guidance
is designed as a ‘pick-up-and-use’ tool to be used in the boardroom setting
today, listing nine key questions (and follow-up questions), covering themes
ranging from climate impacts to liability, that NEDs can ask company
Directors. The questions are applicable across all sectors, globally. In
due course, we intend to release questions targeted at specific sectors.
The guidance
also includes a short scientific summary and an overview of recent developments
in the disclosure and regulatory landscape.
There is an evident weakness in current private sector adaptation responses: they fail to incorporate adaptation measures taken by others into their strategic planning, and miss a range of risks and opportunities embedded in business networks operating at transboundary scales. New research done by researchers at King’s College London has found that by establishing a greater awareness of wide value-chain impacts and working collaboratively to share resources and manage risks, the private sector can adapt more efficiently, and greatly increase its resilience to climate change. This is likely to have far reaching impact as it is widely acknowledged that the private sector plays a crucial role in in fostering climate action and addressing the adaptation investment gap. In response to the recommendations of Task Force for Climate Related Financial Disclosures (TCFD), companies and financial institutions have started to evaluate climate risks and opportunities to adapt to a changing climate. Whilst researchers and scholars have started to investigate how businesses’ internal capabilities may shape adaptation responses, little is known about the influence of value chain relationships on businesses’ adaptive behaviours. Yet no business adapts in isolation: they do so within a context of interactions and interdependencies forged within their operational environment. What’s more, many of the skills and knowledge needed in order to adapt extend beyond traditional organisational boundaries.
This new research looks at agricultural value chains in Jamaica, understanding the importance of managing business relations strategically, and demonstrates the need to better allocate resources in order to build climate resilience along value chains. By mapping all the material, financial, and information exchanges amongst actors in three agricultural value chains, this research reveals how business-to-business interactions – as well as the structure of whole value chains – can influence actors’ adaptive behaviours and capacities.
Business networks generate constrains and opportunities that
affect the adaptive behaviour of firms
Investigations of adaptation responses to drought in agricultural
value chains in Jamaica (access resources at the end of this article) show that
business network dynamics can impact on network sensitive elements of the
exposure, sensitivity, and adaptive capacity of businesses. Actors are
sensitive to the adaptation responses of their partners, depending on how much
they rely on the critical resources that these partners hold. For example, value
chain actors that rely on water utility providers and lack access to private
wells or lakes are highly sensitive in times of drought. These water utility providers
will impose water restrictions and rationing schedules that can increase the
costs of production, potentially disrupting value chain operations.
Similarly, the research finds that the terms of contractual
arrangements can strongly limit the ability of businesses to transfer or share climate
risks, which changes their exposure to climate impacts. Most farmers in Jamaica
do not have formal contracts with agricultural processors, and are therefore able
to respond to the effects of droughts on their crops by increasing the price of
their raw produce (hence transferring the risk). Processors, however, tend to
have fixed price agreements with retailers, exporters and distributors. This
means that, in times of drought, farmers can increase the price of the raw
produce, whilst processors will have to absorb the increases in the price – even
to the extent of having to cut down production in order to cope with the
impact.
But the effects of network dynamics on business adaptation are not
wholly negative. Businesses can draw on the strategic relationships that they
have with others in their network to access valuable resources for adaptation,
such as information and investment capital. In the cassava value chain in
Jamaica, for example, it was found that processors can act as reliable
providers of information or financial resources for small farmers they trust
and with whom they have developed strong relationships. This increases the chances
of access to capital for adaptation for small farmers, which is particularly
important when other potential sources of capital (e.g. bank loans) are not
available. Businesses can also engage with
their customers and suppliers in joint problem solving. By managing the
decision-making process in this collaborative way, workable solutions can be developed
more efficiently, which is of particular benefit in times of environmental
turbulence. Collaborative problem-solving can expose hidden risks, and help developing
management strategies for them, reducing the uncertainties experienced in the longer-term.
The level of resilience of value chains can also influence the
capacity of individual businesses to adapt
In order to better adapt to a changing climate, it is not enough
for individual businesses to forge and sustain strategic relationships with
their direct partners. Businesses’ adaptation is also affected by how these partners
manage their relationships with others. This means that the ways in which
entire value chain networks are structured can influence value chain resilience
and the adaptive capacity of individual actors. In fact, value chains that are
more resilient tend to display greater levels of connectivity, collaboration
and information sharing, which makes them more agile to respond to change. They
also have the ability to re-engineer themselves by being both flexible (i.e.
able to take different paths to respond to a disturbance) and preserving
redundancies within their business functions (such as having multiple and
backup suppliers and safety stocks). These network characteristics also enable
individual actors to better adapt to a changing climate. However, they may also
generate trade-offs; for example, between building redundancy and efficiency,
or between consolidating core capabilities for competitive advantage or
developing new ones for adaptation.
With the use of value chain network analyses, it is now possible to inform the design of value chains in order to increase their climate resilience and support the adaptive capacity of value chain actors. For example, the network structure of resource flows can be investigated, in order to understand how resources are exchanged between value chain actors, which actors hold critical positions within the network, and what levels of diversity and redundancy the whole network holds. From a government perspective, this information can be used to inform and justify the allocation of resources for value chain development.
Network analyses have also been used to demonstrate how business
associations can improve information sharing, helping to promote greater value
chain climate resilience and positively influencing actors’ adaptive capacity.
In Figure 1 below, a representation of the cassava value chain network
illustrates how different categories of actors currently interact in the
exchange of different resources (i.e. information, material and financial
resources), and how diverse the cassava value chain is in terms of type of key
actors holding the network together. Each circle represents an actor, and the
links between them show the resource flows between them (material, financial
and information). The map is generated using a software called Gephi, which
determines the spatial location of actors according to the level of attraction
between the links to eachother. We can see in this diagram that a lot of the
lines are yellow. These yellow lines are showing the resource flows among
actors in the promoters group (an industry cluster composed of different value
chain actors that work collaboratively to promote value chain development). In Figure
2, we see what the resource flows look like for information in this network.
This figure shows the information network and how it changes with and without
the presence (and connections) of the promoters group. When examined
quantitatively, analyses show that the presence of this group increases the
overall level of connectivity of the network in a number of ways: first, by increasing
its overall density; second, by lowering the average path length of the network
(i.e. the number of steps information needs to make in path between any two
actors); and third, by reducing the network’s modularity (a measure used to
understand how fragmented the network is into smaller sub-groups). This means
that actors are more capable of accessing relevant information that may guide
their adaptation practices when the promoters group is active, than when it is
not.
Figure 1. Diagrams showing the information, material and financial flows in the cassava value chain, and the relative importance of different stakeholders and exchanges.
Figure 2. Diagram showing the difference in network connectivity with and without the presence of the promoters group.
A relational view of adaptation in the private sector can enrich
our understanding of cross-scale interactions and transboundary climate risks
What makes the identification and management of climate risks increasingly challenging is the proliferation of business models promoting greater interdependency between actors located in different geographies. This facilitates the transmission of climate impacts across boundaries to completely different parts of globe and to completely different populations. The lack of appropriate climate frameworks enabling transboundary collaboration between institutions is caused, in part, by a shortfall in knowledge about how value chain network dynamics influence climate risk exposure and vulnerability at these transboundary scales. Developing relational approaches to study climate adaptation in the private sector can possibly play a role here. By assisting in the exploration and diagnosis of management problems at multiple scales, relational approaches can help to better characterize the dynamics that influence systemic risk. Furthermore, relational (or network-based) approaches offer tools to help appraise the complex connections between local (e.g. inter-sectorial) and transboundary factors affecting business vulnerability, by accounting for business constraints and enablers spanning beyond traditional organisational boundaries. Research in this area is still in its infancy, and more needs to be done to promote studies investigating the relational aspects of climate adaptation. Greater understanding of the role exerted by business relationships on adaptation will help decision makers to navigate the complexity of climate adaptation challenges and make the private sector more resilient to climate change.
This article is based on the research studies carried by Laura Canevari and peers at King’s College London. Free access available below.
Canevari-Luzardo, L. (2019). Climate change adaptation in the private sector: application of a relational view of the firm. Climate and Development. doi:10.1080/17565529.2019.1613214[
Canevari-Luzardo, L., Berkhout, F., & Pelling, M. (2019). A relational view of climate adaptation in the private sector: How do value chain interactions shape business perceptions of climate risk and adaptive behaviours? Business Strategy and the Environment. doi: https://doi.org/10.1002/bse.2375
Canevari-Luzardo, L. M. (2019). Value chain climate resilience and adaptive capacity in micro, small and medium agribusiness in Jamaica: a network approach. Regional Environmental Change. doi:10.1007/s10113-019-01561-0
Cover photo features photos illustrating key steps along the Cassava Value Chain in Jamaica. Photos by Laura Canevari
Even with strong climate action, we cannot avoid all of the consequences of climate change.
Companies must place a greater focus on building resilience.
As well as averting potentially huge losses, this course of action also offers a sizeable business opportunity.
Despite steadily growing climate action by both governments and companies, we continue to fall short of the level of ambition required to curb climate change. In fact, the UN estimates that even if we meet all the climate commitments of the Paris Agreement, temperatures can be expected to rise this century to 3.2°C above pre-industrial levels, far above the 1.5°C threshold to avoid the most severe climate impacts.
We would be wise to prepare for this – and business is no exception.
Mitigation vs resilience
Attention is often focused on the steps businesses take to mitigate climate change – reducing or preventing emissions of greenhouse gases, or removing carbon from the atmosphere, in order to limit the magnitude of future warming. This remains Plan A in the fight against climate change, and businesses must drive the transition to a low-carbon economy, as seen through initiatives such as Mission Possible.
But even with a major step up in our levels of ambition to reduce greenhouse gas emissions, it is evident that we cannot avoid all the consequences of climate change. We also need to adapt to rapidly changing climatic conditions, building the resilience of society to prepare for whatever might happen next, so that we can absorb and quickly bounce back from shocks, such as storms and droughts, when they do strike.
Top climate risks to business
The first step to better managing the growing climate risks that businesses face is understanding them.
Risk of trillion-dollar losses
The potential economic costs of inaction are staggering. Damage done by climate-related disasters and extreme weather in 2018 alone cost the US around $160 billion, and the numbers are only expected to increase as hazards become more complex and unpredictable.
This is just the startImage: NOAA
Businesses are also bracing themselves for direct impact to their bottom lines. In 2018, 215 of the world’s 500 biggest corporations, including giants like Apple, JPMorgan, Chase, Nestle and The 3M Company reported climate-related financial risks of just under $1 trillion.
Risk to infrastructure and supply chains
With around 80% of global trade embedded in supply chains, business leaders are increasingly aware of risks that could affect their ability to move through the world, including issues of cost, speed and responsiveness. In fact, CDP data reveals that 76% of suppliers have identified ways in which climate change could increase the risk of disruptions to their business.
Globalization means climate disasters can be felt around the worldImage: BSR
During the severe flooding in Thailand in 2011, more than 14,500 companies dependent on regional suppliers experienced significant damage with total insured losses between $15-$20 billion. Western Digital lost 45% of its shipments, HP lost $2 billion, and NEC cut 10,000 jobs due to a global shortage of hard disk drives.
Risk of damaged communities, reputations and stakeholder relations
The first climate-change bankruptcy last year was a historical milestone illustrating how resilience inaction can destroy a business, and cause immeasurable damage to the communities around it.
Following severe drought and devastating wildfires in Northern California last year, one of the largest utilities in the US, Pacific Gas and Electric, filed for bankruptcy, leaving the company with hundreds of filed lawsuits and an anticipated $30 billion in liabilities due to vulnerabilities in its infrastructure.
The fire was one of the nation’s deadliest in modern times. It took the lives of more than 80 people, destroyed more than 18,000 structures, and caused at least $11 billion of damage. The company has been heavily criticized by its consumers, state officials, courts and advocacy organisations for failing to invest in preventative maintenance and other improvements that could have mitigated losses.
Business opportunities in building resilience
It is not all doom and gloom, however. Done right, efforts to build resilience can yield a triple dividend: not only avoiding economic losses, but also offering positive economic and wider social and environmental benefits. In fact, the Global Commission on Adaptation estimates that investing $1.8 trillion globally in five areas could unlock benefits worth $7.1 trillion from now until 2030.
Image: Global Commission on Adaptation
Climate resilience is an opportunity to create new business products. For example, Goldman Sachs’ recent report, Making Cities Resilient to Climate Change, describes potential for “one of the largest infrastructure build-outs in history”, while a global survey of finance players highlights a nascent industry investing in natural capital – water, soil, air and living organisms from which we derive a wide range of goods and services – as investors look to build resilience against climate change.
But not only does climate resilience offer businesses new opportunities, it also offers them a chance to do things better. A study of a dairy supply chain in Mexico showed that innovations that improve climate resilience such as heat-resistant building material, drought-resistant seeds, water-harvesting services, low-drip irrigation and new insurance schemes can also generate business opportunities, including new market niches, and new local technologies, products and services – often at a lower price.
The International Council on Mining and Metals also shows that by proactively managing climate risks, mining and metals companies can reduce costs (for example, by reducing water and energy use), while improving relationships with stakeholders.
Finally, the demands on businesses are changing. This year’s Global Risks Report shows that young people are considerably more concerned than older generations about climate and environmental risks. As millennials and Generation X become an increasing influential demographic, businesses who lead on resilience will be well placed to attract customers, investors and talent.
A new frontline of business leadership
Perhaps the most interesting aspect of current discussions on climate is that they are no longer exclusive to environmental experts, scientists or academics. Mainstream business is beginning to recognise the benefits of taking action.
Most recently, the World Economic Forum’s Resilience Action Platform (RAP), in collaboration with the UK Government, is supporting two new initiatives that highlight ambitious multistakeholder and business-led action on resilience. The Coalition for Climate Resilient Investment, which brings together over 30 organisations with assets totalling $5 trillion, aims to drive investment flows towards resilient assets by better pricing climate risks throughout the infrastructure investment value chain.
The Just Rural Transition, supported by six countries and 39 organizations, aims to help rural areas prepare for a shift towards climate resilient and sustainable food, land use and ecosystems.
As Børge Brende, President of the World Economic Forum, told global leaders at the third Sustainable Development Impact Summit: “It is no longer about the cost of action, but about the cost of inaction, which is far greater.”
The gauntlet has been thrown down.
Climate resilience offers business a stark choice: Prepare now or pay later.
Earlier this month the Australian corporate regulator, ASIC published updates to clarify the application of its existing regulatory guidance to the disclosure of climate change-related risks and opportunities.
ASIC reviewed its guidance following the recommendations of a Senate Economics References Committee report on Carbon Risk and the Government’s response which encouraged ASIC to consider whether its high-level guidance on disclosure remained appropriate.
While ASIC’s review found that its existing, principles-based regulatory guidance remains fit for purpose, to help stakeholders to comply with their disclosure obligations, the organisation has updated its guidance to, amongst other things:
incorporate the types of climate change risk developed by the G20 Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (TCFD) into its list of examples of common risks that may need to be disclosed;
highlight climate change as a systemic risk that could impact an entity’s financial prospects for future years and that may need to be disclosed in an operating and financial review (OFR);
reinforce that disclosures made outside the OFR (such as under the voluntary TCFD framework or in a sustainability report) should not be inconsistent with disclosures made in the OFR; and
The guidance has also been updated to make clear that in ASIC’s view, the risk of directors being found liable for a misleading or deceptive forward-looking statement in an OFR is minimal provided the statements are based on the best available evidence at the time, have a reasonable basis and there is ongoing compliance with the continuous disclosure obligations when events overtake the relevant statement made in the OFR.
ASIC’s review of regulatory guidance follows last year’s publication of ASIC Report 593: Climate Risk Disclosure by Australia’s Listed Companies targeting listed companies, their directors and advisors. High-level recommendations set out in REP 593 included to:
adopt a probative and proactive approach to emerging risks, including climate risk;
develop and maintain strong and effective corporate governance which helps in identifying, assessing and managing risk;
comply with the law where it requires disclosure of material risks; and
disclose meaningful and useful climate risk-related information to investors –the voluntary framework developed by the TCFD has emerged as the preferred standard in this regard and ASIC strongly encourages listed companies with material exposure to climate change to consider reporting voluntarily under the TCFD framework.
ASIC commissioner John Price said, ‘Climate change is an area which ASIC continues to focus on. The updates to our regulatory guidance, together with the publication last year of Report 593, round out ASIC’s response to the Senate Report on Carbon Risk. Our updates will help stakeholders to comply with their disclosure obligations in prospectuses and the operating and financial review for listed companies’.
ASIC welcomes the continuing emergence of the TCFD framework as the preferred market standard, both here in Australia and internationally, for voluntary climate change-related disclosures. ASIC considers this to be a positive development and we again strongly encourage listed companies with material exposure to climate change to consider reporting voluntarily under the TCFD framework.
‘While disclosure is critical, it is but one aspect of prudent corporate governance practices in connection with the mitigation of legal risks. Directors should be able to demonstrate that they have met their legal obligations in considering, managing and disclosing all material risks that may affect their companies. This includes any risks arising from climate change, be they physical or transitional risks.’ Mr Price said.
In the coming year, ASIC will conduct surveillances of climate change-related disclosure practices by selected listed companies. ASIC will also continue to participate in the Council of Financial Regulators’ working group on climate risk and participate in discussions with industry and other stakeholders on these issues.
In March 2019, Clyde & Co. launched its climate change report ‘Climate change: Liability risks, a rising tide of litigation‘. The report explores the liability risks that organisations have faced and continue to face as plaintiffs attempt to use the courts to further their cause or sue for damages.
The report provides a broad overview of the evolving
litigation risk landscape arising from the effects of climate change, identifying
some of the key themes, controversies and legal hurdles.
The authors suggest that the significance of this trend
should not be underestimated, with over 1200 climate change cases having been
filed in more than 30 jurisdictions to date. As both litigation approaches and
scientific evidence evolve, litigation increasingly represents a powerful tool
in the hands of those who seek to attribute blame for contributing to effects
of climate change or failing to take steps to adapt in light of available
scientific evidence.
In as much as the physical risks of climate change raise
both direct and indirect implications for a diversity of sectors, so too do the
associated legal risks. As Clyde & Co Partner Nigel Brook remarks, “As the
volume of climate change litigation grows and legal precedents build, new
duties of care are emerging and the liability risk landscape is undergoing a
shift which is likely to affect a wide range of commercial sectors”.
The authors classify litigation which has been emerging over
the last two decades into three broad categories:
1. Administrative cases against
governments and public bodies;
2. Tortious claims against
corporations perceived as perpetrators of climate change;
3. Claims brought by investors
against corporations for failing to account for possible risks to
carbon-intensive assets or for failing to account for or disclose risks to
business models and value chains in financial reporting.
The report also addresses novel approaches that claimants
are adopting when bringing climate litigation, as well as the practical and
legal considerations that these give rise to.
Finally, the report looks at global trends in climate
litigation and their implications for businesses in different industries around
the world, highlighting the issues which should be on companies’ radars over
the months and years to come. The authors indicate that climate change
litigation has already been deployed against companies beyond the oil and gas
majors and suggest that this trend is likely to continue.
Litigation has advanced far from being targeted at first line ‘emitters’ to being used as a means of holding companies accountable for how they respond to the physical and financial risks of climate change. Clyde & Co. plans to explore these liability risks in greater depth in future reports.
An update to the landmark
2016 Hutley opinion has been released by the Centre for Policy Development (CPD) on
29th March, 2019. The 2016 opinion set out the ways that company directors
who do not properly manage climate risk could be held liable for breaching
their legal duty of due care and diligence.
The supplementary opinion, provided again by
Noel Hutley SC and Sebastian Hartford Davison on instruction from Sarah Barker,
reinforces and strengthens the original opinion by highlighting the financial
and economic significance of climate change and the resulting risks, which
should be considered at board-level. It puts an emphasis on five key developments
since 2016 that have built up the need for directors to take climate risks and
opportunities into account and reinforced the urgency of improved governance of
this issue. While the 2019 opinion is rooted in the Australian context, just as
the 2016 opinion, it has much wider applicability, as much of the developments
discussed in the update have been simultaneously happening in jurisdictions
outside of Australia.
The five areas of development covered in the 2019
supplementary opinion include:
Progress by financial supervisors: The 2019 opinion suggests statements made by
Australian supervisory organisations such as the Australian Prudential
Regulation Authority (APRA), Australian Securities and Investments Commission
(ASIC) and the Reserve Bank indicate they now all see the financial and
economic significance of climate change. Similar realisations have been
happening among supervisory organisations in the UK, with the Prudential
Regulation Authority (PRA) due to imminently release a supervisory statement on banks’
and insurers’ approaches to managing the financial risks from climate change,
following a public consultation on the matter in late 2018 / early 2019. At the
European level, the wider sustainability of the financial system is under review
with the European Commission rolling out its
Action Plan for Financing Sustainable Growth;
New reporting frameworks: Three new reporting frameworks have emerged since 2016. The most
broadly applicable is The Task Force on Climate-Related Financial Disclosures
(TCFD) recommendations. In June 2017, the TCFD, a task force set up by
the Financial Stability Board in 2015, published its final
recommendations to help companies disclose climate-related risks and
opportunities. The Principles
for Responsible Investing (PRI) and CPD frameworks have now both aligned their
climate-reporting frameworks with the TCFD recommendations. The other two
reporting frameworks mentioned in the 2019 supplementary opinion are more
relevant for the Australian context, and include the new recommendations on
assessing climate risk materiality from the Australian Accounting Standards
Board (AASB) and the Auditing and Assurance Standards Board (AUASB), as well as
the updated guidance from the ASX Corporate Governance Council;
Mounting investor and community pressure: Investors and community groups are increasing
voicing concern around climate risks;
Development of the scientific
knowledge: The UN Intergovernmental Panel on Climate Change (IPCC)
published a special report
on the impacts of 1.5 °C warming in 2018. The opinion recognises this as a “notable
development in the state of scientific knowledge” that affects the gravity and
probability of climate risks which directors need to consider; and
Advances in attribution science: Important developments in
attribution science have now made it easier to identify the link between
climate change and individual extreme weather events.
The opinion
suggests management of climate risks will require engagement with company
directors in certain sectors in particular. These include banking, insurance,
asset ownership/management, energy, transport, material/buildings, agriculture,
food and forest product industries.
CPD CEO Travers McLeod, explains the
implications of this supplementary opinion for company directors, stating “the
updated opinion makes it clear that the significant risks and opportunities
associated with climate change will be regarded as material and foreseeable by
the courts. Boards and directors who are not investing in their climate-related
capabilities are exposing themselves and their companies to serious risks”,
according to a press statement.
Mr Hutley and Mr Hartford Davis write “the
regulatory environment has profoundly changed since our 2016 Memorandum, even
if the legislative and policy responses have not” […]“These developments are
indicative of a rapidly developing benchmark against which a director’s conduct
would be measured in any proceedings alleging negligence against him or her.”
The 2019 update to the 2016 landmark Hutley opinion also
provides ample evidence as to why company directors all over the world not only
need to be aware of their firms’ contribution to climate change – it is just as
important to assess and disclose their potential climate risks in a transparent
manner. It is therefore vital to ensure that future business plans are in line
with the Paris Agreement and to also anticipate and prepare for climate change
impacts, both in terms of risks and opportunities. The voluntary TCFD
recommendations provide a framework for both corporates and financial
institutions for assessing and disclosing climate risks and opportunities, and
mandated disclosures are on the horizon.
Acclimatise – experts in physical risk assessment and disclosures
Acclimatise has worked on physical climate risk and
adaptation with corporates and financial institutions for over a decade,
helping them identify and respond to physical risks and to take advantage of
emerging opportunities generated by a changing climate. We have witnessed the
corporate, societal and environmental benefits stemming from the promotion of
resilience-building strategies.
To discuss how your organisation can meet TCFD or other disclosure requirements, please contact Laura Canevari: L.Canevari(a)acclimatise.uk.com
With the Arctic heating up twice as fast as the rest
of the world, the borders its sea ice once protected are being left exposed. That
so-called unpaid sentry is disappearing fast, giving way to not just new shipping
routes but also security challenges countries in the region are reacting to.
Sea ice in the Arctic is being lost at a staggering rate of over 10,000 tonnes per second, by 2035 the region could be ice-free during summer. Speaking to The Guardian, Klaus Dodds, professor of geopolitics at Royal Holloway, University of London, explained “The unique Arctic security architecture has shape and form that come from natural extremities. If the Arctic becomes just another ocean, this breaks down. It’s elemental.”
This is also the reason why military activity in the
Arctic is increasing: the prospect of a completely open water body is cause for
concern among countries that until recently relied on sea ice for securing
their northern borders. However, it should be emphasised that an increase in
military activity does not imply imminent conflict. Comparing the situation to
that in the South China Sea – where nations compete not through combat but by
demonstrating presence – former Norwegian defence minister Espen Barth Eide
said “It’s not because there is an immediate threat, it’s that, as an area
becomes more important, it’s natural to have a heightened military presence.”
With national security concerns also comes an
increased sense of competition for the growing business interest in the region.
The Northern Sea Route from Asia to Europe can save ships up to 20 days travel
time as opposed to the Southern Sea Route (Suez Canal passage). Parts of the northern
passage historically have only been ice-free for two months each year. However,
as mentioned above, that is rapidly changing. Remote places like Tromsø in Norway
are becoming bustling tourism and business hubs. “Now we have a historically
strange situation with political and economic activity in the Arctic. So many
people are knocking on our door, including business and state representatives
from China, Pakistan, Singapore and Morocco,” said Tromsø mayor Kristin Røymo.
The receding ice is a massive game changer, especially for Russia. Not only does the country have the largest border in the Arctic region but must of the Northern Sea Route currently extends across Russia’s exclusive economic zone. As long as the ice doesn’t recede beyond that zone, Russia will get paid by anyone who uses that shipping route. But as sea ice recedes further, ships will be able to travel in international waters. China, an observing member of the Arctic Council since 2013, is one of the countries exploring this possibility and the potential for infrastructure investments in a “Polar Silk Road”, threatening the exclusive position Russia has been in historically.
In addition to the growing interest in the Arctic for its shorter shipping routes, oil & gas companies are sniffing their chance at exploring new oil and gas fields. Norway came under fire earlier this year for having approved over 80 new exploration licenses. At the Arctic Frontiers conference in January, environmentalists highlighted the dual role of oil as both a driver of climate change, which is heavily impacting the Arctic, and as a driver of increasing resource extraction in one of the most fragile and pristine environments on this planet. These tensions and the growing competition are also putting into question peaceful cross-border cooperation efforts that held up even during the cold war and regulated fishing, scientific research and even reindeer herding.
The British heatwave may seem far behind us, but Christmas tree growers across Britain are still feeling the heat after soaring temperatures wiped out a third of their new crop.
And while it is unlikely that customers will be left without a tree this year, farmers are becoming increasingly aware that they must adapt to a future of extreme conditions in order to protect future yields.
This is becoming especially apparent after the Met Office announced heatwaves will soon become the norm in Britain,with summer temperatures shooting up by over 5C within decades.
Searing temperatures and limited rainfall over the course of the summer caused crops to ripen early, resulting in lettuce and broccoli shortages. On Christmas tree farms, young saplings with smaller roots were left unable to suck up enough water from the parched ground.
Adrian Morgan from the British Christmas Tree Growers Association says that up to 70percent of trees planted in the spring perished in the heat. This is a particular cause for concern as the UK sources up to a fifth of its Christmas trees from European nations.
More specifically, a lack of predictability is the root cause of inadequate growth.The late Beast from the East in 2018 meant farmers couldn’t plant spring crops until much later, in which they were immediately hit by the dry weather in the summer.
Adrian Morgan points to planting in the autumn as a means of ensuring future harvests,a move that will prove difficult for many.
“It’s a leap of faith in a way, because a lot of people growing Christmas trees in England and Wales are also arable farmers, and there’s a significant amount of pressure on them to get their harvest in,” he said.
Due to the decade-long growing time of Christmas trees, the effects of this year’s extreme weather will not be fully felt for several years. Despite this, growers are already accepting the need to change in order to save their business, as well as the season’s most beloved plant.
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.
Types of adaptation strategies being reported by companies, divided into soft, hard and Ecosystem-based Adaptation (EbA). The size of the circles represents their relative use overall.
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.
Cover photo by Lieut. Commander Mark Moran, NOAA Corps, NMAO/AOC (CC BY 2.0): Views of inundated areas in New Orleans following breaking of the levees surrounding the city as the result of Hurricane Katrina. September 11, 2005.
Recent research has concluded that while Australian companies are increasingly aware of the need to disclose their climate risks, the majority are failing to demonstrate strategies to actually do so – this could lead to legal challenges.
To complete this research, Market Forces analysed the public disclosures of the 74 ASX100 companies (as of July 2018) that operate in sectors highlighted by the Taskforce on Climate-related Financial Disclosures (TCFD) as facing the highest levels of climate risk.
According to Market Forces companies are now disclosing more detailed discussions of the risks and opportunities they face from climate change. But only 12% of them have disclosed detailed analyses of how their business will cope under different climate scenarios. Even fewer have actual plans to reduce their emissions.
Of the 74 analysed companies only 3, South32, AGL, and Stockland, were found to disclose in line with all the TCFD recommendations. Commonwealth Bank, BHP, Westpac and ANZ each come close to fully satisfying the recommendations while Macquarie and Mirvac are among the companies that have committed to addressing all recommendations in their 2019 reporting.
These findings are especially important since Australian regulators are increasing their scrutiny regarding climate risk disclosure. A recent report by the Australian Security & Investments Commission (ASIC) found many companies were actually breaking the law by failing to adequately consider and disclose climate risk.
However, regulators need to clarify what specific climate-related disclosures are required of companies operating in even the most exposed sectors and also mandate a TCFD-compliant climate risk reporting for all companies operating in ‘high risk’ sectors, as well as financial institutions.
Read about Acclimatise’s work on assessing physical climate risks and opportunities with UNEP FI and 16 commercial banks by clicking here.
