Each month, NBS spotlights key sustainability issues for business leaders. These issues have been identified by NBS’s Leadership Council, a group of Canadian businesses recognized for their leadership in sustainability. This month, the focus is on how companies can prepare for climate change. Dr. Jonatan Pinkse of Grenoble Ecole de Management and Ms. Federica Gasbarro of Sant'Anna School of Advanced Studies identify 5 steps businesses can take to prepare for an era of extreme events.
The Importance of Adaptation
Increasingly intense and frequent hurricanes affecting North America are only one of the impacts associated with climate change. But Hurricanes Katrina (2005), Ike (2008) and Sandy (2012) spark the debate. Extreme weather events make people aware of their vulnerability to forces of nature they cannot control.
The renewed conversation about the physical impacts of climate change after Hurricane Sandy reflects a broader shift in the global climate debate. There is wider recognition of the need for adaptation. Extreme events can’t be prevented completely by reducing greenhouse gas emissions (mitigation). Certain physical impacts are simply unavoidable, and society had better start preparing to cope (adaptation). Adaptation is not throwing in the towel; it is a realistic approach to dealing with climate change.
Adaptation is relevant to society and to business, because physical climate impacts translate into business problems: e.g. related to resource availability; safety of personnel, facilities and operations; and market changes. But effects on business will vary widely, as will effective preparation. How do managers know what adaptation means for their organization and what changes will be necessary?
Four Steps for Organizations
Step 1: Understand your Exposure and Vulnerability to Impacts
In a recent study of how the oil industry is adapting to climate change, we found that assessment of exposure and vulnerability is the first crucial step of the adaptation process. This analysis involves a change in mindset. Rather than thinking about your business’s impact on the environment, you need to learn about how the environment supports your business activities: for example, by providing water or other resources for operations. (NBS’s guide to ecosystem services can help you with this evaluation.)
Once you understand how your business depends on certain natural resources, you’ll need to understand how climate-related physical changes could affect these resources — as well as other aspects of your business. What gradual and extreme events will climate change cause? What is their magnitude, timeline, frequency, and likelihood to occur? You can refer to the Intergovernmental Panel on Climate Change for a global overview of these changes or to regional research reports for details about local areas (e.g. Natural Resources Canada, The US Global Change Research Program, The Prime Minister's Science, Engineering and Innovation Council of Australia).
Physical changes related to climate could affect, for example:
- Company infrastructure: e.g. personnel, production plants, operations, and supply channels. For example, the melting of permafrost could severely hinder oil operations in the Arctic. The drilling season would shorten; companies will also need to deal with floating icebergs.
- Supply, demand and competitive conditions of your major markets. For example, temperature extremes tremendously increase demand for heating and/or cooling. During such peaks, demand for electricity and gas could outpace supply. Expanding the current energy infrastructure can require massive investments.
- Regulations and other frameworks, including relationships with communities and local industries. For example, increased water scarcity could put companies in conflict with local communities, perhaps requiring new regulations.
Vulnerability should be looked at broadly. Climate change can have implications for firms’ financial, strategic and legal operations. For example, due to the disappearing permafrost, oil firms risk increased spills. As the recent BP oil spill showed, spills can have significant financial and legal consequences and lead to a strategic turnaround or even bankruptcy.
Once you have assessed your exposure and vulnerability, it is time to start reducing any risks that are beyond an acceptable threshold.
Step 2: Use Technical Solutions to Reduce Vulnerability
Start reducing risk by adopting technical solutions to make existing business activities more able to adapt. Companies can develop or adopt new standards related to climate change. They can make changes to maintenance, materials, facilities, assets and process engineering. For example, the oil industry is developing specific standards to anchor offshore rigs during the hurricane season. For information on such standards and changes, you may wish to consult with your professional association. Consultants can also offer help.
Technical solutions often also seek to reduce dependency on affected natural resources through consumption reduction, re-use and recycling: e.g. to deal with limited water availability.
Step 3: Diversify to Reduce Exposure Further
Climate-related physical changes could become so great that technical solutions alone will not be enough. For example, impacts could affect production volume decisions so that upgrading facilities is not economically viable. Production could be interrupted for extended periods, affecting a company’s ability to meet contract requirements. In this case, companies should opt for geographical or product diversification.
Changing a facility’s location is a radical measure that might be appropriate for older facilities in risky areas. But while relocating existing facilities saves large repair costs, the opportunity cost might be too high, forcing companies to write off investments early.
A cheaper approach is to diversify geographically only with new investments. Once climate hazards are factored in, different locations might become more attractive. For example, the oil industry is shifting investments towards onshore rather than offshore facilities, because offshore facilities are more exposed to weather and climate extremes.
Adaptation could also be achieved by diversifying products and assets. While this kind of diversification might be less radical, it could fundamentally change the strategic direction of the company.
Step 4: Get Ready for Extreme Events and Develop Crisis Management Skills
If assessing your exposure and vulnerability reveals that some weather extremes (e.g. hurricanes, storms, floods, bushfires, droughts, etc.) can’t be avoided, it’s time to improve your company’s resiliency and ability to deal with crises. Some specific steps:
- Use financial instruments to share and shift risks. Take out insurance or consider physical risks in contract negotiations, economic evaluation of new projects and joint ventures.
- Cooperate more closely with industry partners or other stakeholders. In the oil industry, for example, companies have joined forces to share lessons-learnt and resources to prepare for emergencies in case of extreme weather events. Cooperation can also involve other stakeholders, such as local industries and communities in affected areas, in order to reduce stress on natural resources and prevent conflicts.
- Set up emergency and restoration plans to secure assets, personnel and operations.
Adaptation — and Mitigation
Adaptation adds a whole new dimension to thinking about business responses to climate change. Companies’ incentives to act may be obvious once they start experiencing disruptive events. However, companies shouldn’t forget about mitigation — reducing GHG emissions. In fact, mitigation actions can help to slow down climate-related physical changes and thus lower the need for adaptation. Therefore, mitigation actually remains an indispensable part of a long-term adaptation strategy.
Network for Business Sustainability & National Roundtable on the Environment and the Economy. 2011. Managing the business risks and opportunities of a changing climate: A primer for executives on adaptation to climate change.
Wagner, G. & Weitzman, M. L. 2012. Was Hurricane Sandy the 'fat tail' of climate change? Wall Street Journal Blogs.
Intergovernmental Panel on Climate Change. 2012. Managing the risks of extreme events and disasters to advance climate change adaptation.
About the Authors
Jonatan Pinkse is associate professor at Grenoble Ecole de Management, France. His areas of expertise are corporate climate strategy, sustainability and renewable energy. He has published papers in various international journals, including Journal of International Business Studies, California Management Review and Energy Policy and authored the book International Business and Global Climate Change. In 2011, he was awarded with the Academy of Management O.’s N.E. Emerging Scholar Award.
Federica Gasbarro is a Ph.D. candidate at Sant'Anna School of Advanced Studies, Italy. Her thesis, which she will defend early 2013, deals with corporate responses to climate change with a focus on adaptation strategies and the role of environmental management systems for emissions trading. She is also involved in applied research projects funded by the European Commission, e.g. the LAIKA project (Local Authorities Improving Kyoto Actions), and in consultancy for companies and non-profits.