The time is upon businesses to make concrete plans to address the impact of climate change. Assessing climate change risk should now be considered a critical part of building organizational resilience over the short-, medium- and long-term.
The latest report from the United Nation’s Intergovernmental Panel on Climate Change (IPCC), Climate Change 2021: the Physical Science Basis concludes that climate change is “widespread, rapid, and intensifying”.
Business owners, boards and executive teams need to urgently take a ‘whole of enterprise’ approach to managing climate change risk. An important part of this approach is also to look to the opportunities that will be there to grow businesses and take advantage of the changing business environment during the transition to a lower carbon economy.
Getting Organized to Assess Climate Change Risk
Scenario planning and financial modeling will need to undertaken to assist develop business strategies. Undertaking this will not be easy. Climate change poses unique strategic, financial and operational questions and potential challenges for all businesses. These include:
- What time frame should we be looking at – 5, 10, 20 or 50 years ?
- How do we determine what assumptions we put into each scenario ? Should we have a range of scenarios for each time horizon ?
- How should we look to model unique geographic or business segment impacts if there is limited or no supporting scenario data available ?
- How do we consider and engage with business partners and suppliers to assess jointly the impact of climate change ?
- How should we think about any potential competitor and government policy responses ?
There are no hard and fast answers to the above and the approach very much depends on the industry and nature of the business.
Defining Climate Change Risk
Climate change risk is the risk that the firm or organization is impacted or suffers loss from the adverse consequences of climate change (actual or perceived) and its consequences on the firm or organization. This can be due to the direct impact of climate change on the activities and operations of the business or changes in business practices of the organization, its customers, its industry and/or governments. The risk can be direct or indirect.
There is anxiety about considering climate change risk, given the time horizons involved and uncertainty in describing the future landscape. It is, however, in simple terms another exercise in dealing with uncertainty. Many businesses deal with uncertainty already – be it disruption, rapid technological change, changing industry dynamics, or government policy and regulatory changes – to name a few.
Six Key Steps
In developing an approach toward climate change risk, a six-step process is recommended. These steps will enable a structured approach which starts at a high level – to develop the time horizons and scenarios to be modeled – and then ends with development of a strategic road map. The six steps are:
- Define the time horizons
- Workshop the high level, external landscape
- Assess key business impacts
- Consider external government, public policy & regulatory factors
- Model the scenarios
- Develop a strategic decision-making road map
- Define the time horizon
Given the impact of climate change will inevitably evolve and change (in emerging and unknown ways) it will be necessary to consider its impact over the short, medium and long-term. The choice of scenarios will vary from business to business and industry to industry. The time horizons could be anywhere between 3 years and 30 years (or even longer for some businesses such as those in the transportation, energy or agriculture sectors).
Do not be overly ambitious with multiple scenarios given the work that will be involved in collecting data to use in the scenarios. The difference between some time horizons – for example between 10 and 20 years – may not be a lot at a high level. It is not necessary to consume valuable management time on broadly similar scenarios. It may suffice for many businesses to simply choose two: for example, 5 years and 20 years.
2. Consider the future external landscape
This will be part art, part science. This will involve collating data and information on the external environment (the physical, environment, the economy and society) over the agreed time horizons. What is the impact of climate change on the economies and communities you operate in ? What changes are likely to have taken place ? How have consumers responded? What demographic changes have taken place? What community and business have changed, or are likely to have ceased to take place in their current form?
To assist with the task, seek to work with other industry participants, industry associations, suppliers and business partners.
3. Assess key business impacts
Once a clearer picture has been painted of the future external landscape for each time horizon, the next task is to assess the business impacts on the firm or organization’s activities. The analysis will be tailored to the nature and scope of the firm or organization’s business activities. Seek to be involved in and leverage off work that industry associations, government agencies, business partners and suppliers may have already undertaken.
Consideration should also be given to the impact on the firm or organizations’ ability to raise equity, borrow money and insure its business assets. The impact will depend on the nature of the firm or organization’s business activities.
4. Consider external government, public policy & regulatory factors
Business planning always needs to have a government, policy and regulatory lens run over it. For assessing climate change impacts, likewise, consideration needs to be given to potential policy responses.
This may be a challenging exercise to do and it may be worth looking at a range of subsidiary scenarios here. In addition, an industry-wide response may in turn drive policy and regulatory initiatives.
5. Model the scenarios
Modelling the scenarios will be a high-level outline of the nature of the firm or organization’s business profile in the future – taking into account climate change impacts and the likely range of community, business, economic and policy outcomes.
The scenarios can be solely strategic – which will be more directional in nature – or they can be strategic and financial if it is possible for the latter to be undertaken in considerable detail.
6. Develop a strategic decision-making road map
Steps 1-5 will inform board and management of a firm or organization of the likely impact of climate change on its business activities in the short-, medium- and long-term. The data collection, analysis and discussion will facilitate the development of a range of strategic issues to address and potential business opportunities.
More detailed work can be delegated to specific working groups, third parties or the management of business areas impacted, as necessary.
The six steps outlined will provide businesses with solid foundations to commence thinking about how to reshape its activities, strengthen its resilience and identify opportunities arising from the changes unleashed by climate change. The scenario planning exercises, and strategic planning that follows, will be both iterative and ongoing.