How Companies Can Build Business Climate Resilience

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  • How Companies Can Build Business Climate Resilience

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    Climate change has displaced over 22.5 million people, more than 800 million people lack sufficient food, and over one million animal species are facing extinction. The Intergovernmental Panel on Climate Change (IPCC), a United Nations (UN) body for assessing the science related to climate change, has estimated that even if the globe meets all the climate commitments under the Paris Agreement, temperatures will still result in 3.2˚C warming by 2100. This is far above the 1.5˚C threshold to avoid severe climate change impacts.

    Resilience defined by the IPCC refers to the capacity of social economic and environmental systems to cope with a hazardous event, trend, or disturbance. For companies, it is also reflected in the capacity of responding or reorganizing in ways that maintain their essential functions, identities, and structures, and the capacity of adaptation, learning, and transformation. To build climate resilience, the first thing for businesses is to understand and assess the risks they are facing.

    Three Risks Posed by Climate Change

    Physical risks. Climate change brings more frequent and severe weather events like flooding, droughts, and storms. Examples like heavy rainstorms in Henan Province of China this summer have been linked to human-driven climate change. Those events bring physical risks that impact the society and economy directly.

    Transition risks. When moving towards a less polluting economy, transition risks could occur. Transition risk means that some sectors of the economy would face shifts in asset value or costs increases when doing business. One example is the energy industry. If regulatory policies were to change align with the Paris Agreement, 67% of the world’s known fossil fuel reserves should not be used. This could directly affect the investment values in sectors like coal, oil, and gas.

    Liability risks. When people and businesses seek to compensate for the losses that they may suffer from the physical and transition risks of climate change, liability risks may occur. It is reported that the Zhengzhou heavy rainstorms have triggered insurance claims of RMB11bn, because thousands of cars and property are damaged by the floods. The People’s Insurance Company of China Limited (PICC) and Ping An Insurance Company have together received almost 250,000 claims from clients, marking itself the largest natural catastrophe for insurance companies in China’s history.

    Opportunities in Building Resilience

    Though climate change poses risks to society and economy, it is not all doom and gloom. According to World Economic Forum (WEF), the right efforts to build resilience can yield a triple dividend:

    Avoiding economic losses. Physical climate change risks have a significant impact on basic economic system function, while sectors such as electricity, water, roads, and the internet are key components of the function. Alone in 2018, the climate-related disasters and extreme weather cost the US around USD160bn. To build resilience is to reduce the cost of economic losses.

    Offering positive economic benefits. The Global Commission on Adaptation estimates that investing USD1.8tr globally in five areas could unlock benefits worth USD7.1tr until 2030. The five areas include strengthening early warning systems, making new infrastructure resilient, improving dryland agriculture crop production, protecting mangroves, and making water resources management more resilient. As new products may be innovated in these areas, it will finally produce a positive impact on the whole economy.

    Offering wider social and environmental benefits. Innovations could not only improve climate resilience but also generate business opportunities. Examples as heat-resistant building materials, drought-resistant seeds, water-harvesting service, low-drip irrigation, and new insurance schemes indicate that business opportunities could do a better impact on society and environment.

    Making Business Resilient to Climate Change

    For companies that face climate-related risks when running their businesses, building business resilience to climate change will inevitably become a priority. Business climate resilience on one hand is preparing for the physical risks associated with climate change, while on the other hand is shifting to a net-zero emission future, according to TCFD.

    (Source: TCFD)

    For physical risks, companies should prepare to withstand them. What companies should do to mitigate these risks is enhancing their continuity planning. The actions can include developing emergency plans for operations, transferring to flexible and adaptive supply chains, and predictive analysis for future shocks.

    For transition risks, companies should seek the transformation of business models and seize new opportunities as the whole economy strives to achieve carbon neutrality. Companies need to consider the various risks associated with the transition, including public opinions, investor sentiments, competitor behaviors, as well as actions taken by governments.

    On a practical basis, there are also three steps to achieve business climate resilience suggested by the World Business Council for Sustainable Development (WBCSD). First, develop and maintain ambitious mitigation efforts. Second, adapt to ensure business continuity in the face of climate-related physical risks. Last, assess the connections, dependencies, and value to society and nature.

    Reference

    https://docs.wbcsd.org/2019/09/WBCSD_Business-Climate-Resilience.pdf

    https://www.weforum.org/agenda/2020/01/climate-resilience-is-set-to-make-or-break-businesses/

    https://www.bankofengland.co.uk/knowledgebank/climate-change-what-are-the-risks-to-financial-stability

    https://assets.kpmg/content/dam/kpmg/ie/pdf/2020/01/ie-the-business-case-for-climate-action.pdf

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