Are businesses ignoring climate resilience on the net-zero journey?
From the flooding caused by Storm Dennis in the UK to the wildfires that have plagued Australia, the damage caused by climate change is becoming more tangible and frightfully frequent. But is the business response of pledging to deliver net-zero emissions enough?
In January 2019, PG&E, the owner of US’s largest power utility, filed for voluntary Chapter 11 bankruptcy protection, succumbing as the world’s first corporate climate casualty as a result. PG&E’s financial performance was handicapped by prolonged drought and hazardous wildfires.
In the 13 months since that filing, the harsh impacts of climate change have been felt across the globe. Economic damage worldwide from flooding last year was estimated to be $82bn - the greatest of any natural disaster. Just $13bn of that was insured. That figure is set to be dwarfed by the $100bn costs of the Australia wildfires, of which total insurance payouts are expected to exceed $1bn.
The response to what climate scientists have been warning will happen for decades is to listen to the climate scientists. Based on the Intergovernmental Panel on Climate Change (IPCC) special report, many businesses and nations are aligning to climate science in an attempt to deliver net-zero emissions by 2050. Unlike current climate-induced damage, the IPCC claims the net-zero transition will not be a burden on the global economy.
The rhetoric being repeated by UK ministers is that the nation’s legally binding net-zero target will “end [the UK’s] contribution to global warming”. If the back-to-back storms of Ciara and Dennis are anything to go by, as the UK strives to end said contribution, it will still be hurt – both physically and financially – by climate impacts, whether that be flooding, heat waves or rising sea levels.
Indeed, it is estimated that flooding damage cost UK businesses £513m in 2015 alone. And in a letter in The Telegraph earlier this week, Environment Agency chair Emma Howard Boyd pledged "to build climate resilience into everything we do" in response to the flooding damage in the UK, suggesting that resiliency is not a national strong point as of yet.
Sarah Winne is a climate resilience specialist at engineering company Ramboll and believes that “gaps” exist in UK policy – such as the National Adaptation Programme - when it comes to resiliency and has called for corporates to be more proactive when establishing sustainability strategies.
“There are limits to government policy and businesses do need to look at their own operations and supply chains to try to identify the obvious physical risks,” Winne tells edie.
“They should take a step back and look holistically across their business. By identifying what problems they’ve experienced already during flooding, overheating and cold snaps, and what could happen when these happen more regularly and do more damage, they can ask who needs to be involved in the management of those risks. I think they should look at embedding the process of climate risks into their existing risk management processes.”
The private sector has already been hugely supportive of the UK Government’s net-zero ambition, with businesses from a variety of heavy-emitting sectors pledging their own net-zero commitments ahead of the 2050 timeframe.
Interestingly, there is a correlation between the rise in public demand for sustainable business and business striving to become net-zero. Essentially, climate change is viewed as a strategic reputational risk, more so than a physical one. While the net-zero movement has delivered an unprecedented step-change in how corporates respond to their contributions towards climate change, it doesn’t account for how a changing climate will impact their ability to operate.
“Although it is critical that businesses embrace carbon neutrality and they figure out how they can be net-zero quickly and effectively, I’m concerned that their missing out by not trying to build their resilience strategies and figure out what their adaptation options are,” Winne adds. “We can’t drop the ball on adaptation on this quest to become carbon-neutral.”
Globally, we are currently on course for temperatures to rise by at least 3C above pre-industrial levels, with the United Nations Environment Programme (Unep) warning that drought, hunger disease, conflict and mass migration will follow as a result. This will undoubtedly lead to systems shocks that will impact all businesses, regardless if they are net-zero or not. The impact will be tangible as it will directly impact the profitability of business.
It has already been estimated that 215 of the largest companies in the world risk collectively losing up to $1trn to climate impacts, with most of this risk set to hit within the next five years. The data compiled by CDP found that of this amount, $250bn was attributed to write-offs of stranded assets, which are predicted to be partly accounted for by the declining profitability of high-carbon facilities and partly due to the physical impacts of rising temperatures.
Oversight is arguably the first and most important step that a business can take to examine how resilient it is to current and future climate shocks, especially as nations look to move the dial on the global heating trajectory which offers multiple future scenarios that can all impact business.
The recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which is now supported by more than 1,000 organisations, explains how businesses can use “scenario analysis” as part of their disclosure to create action plans and pathways to decarbonise their operations.
The concept of scenario analysis is that it encourages businesses to explore uncertainty to create a “well-established method for developing strategic plans that are more flexible or robust to a range of future states”. Through the analysis, businesses should evaluate a range of climate-related scenarios, including a 2C scenario to explore physical, strategic and financial risks and opportunities that could emerge.
The European Bank for Reconstruction and Development (EBRD) and the Global Centre of Excellence on Climate Adaptation (GCECA) have since launched an Advancing TCFD guidance on physical climate risk and opportunities guidance strategy which recommends that businesses “integrate scenario analysis of physical climate risks and opportunities into existing planning processes to ensure strategic, flexible and resilient businesses and investments”. The guidance also adds that a corporation’s vulnerability to climate impacts will range from physical exposure of facilities and operations to supply chains, logistics networks and customers and markets. As such, weather variability and lifetime asset duration should be examined across all future climate scenarios.
The TCFD recommendations provide businesses with an X-ray of their climate resiliency but are subject to uncertainty around future risks and opportunities and the potential and still undefined financial impacts. However, tools do exist that can be used today, in order to get a better understanding of physical climate risks.
From risk to resilience
IPCC’s Representative Concentration Pathways (RCPs) outline various scenarios based on emissions, land use and land cover while the WRI’s Aqueduct Risk Atlas can enable businesses to map out water-based risks and opportunities worldwide. Additionally, the TCFD recommends looking at the UN Food and Agriculture Organization’s GAEZ Agri portal for assessing agricultural resources and risks.
The British Standards Institution (BSI) also published its first standard on climate change adaptation last year, creating a framework for how businesses can develop measures and report and assess strategy and plans which increase resilience against climate impacts. The ISO standard has been designed to provide a framework that enables corporates of all sizes to consider climate change adaptation when creating new policies, strategies, plans and activities.
Evidently, net-zero strategies are becoming a requirement for businesses looking to respond to the reputational risks of failing to become more sustainable and create new financial opportunities as a result. Yet, bottom-line prosperity should also account for risk, and as the earlier months of 2020 have proved, climate change is set to churn up a lot more risks for businesses to mitigate against.