The Importance of Climate Change Adaptation in Business
August 2014
The Importance of Climate Change Adaptation in Business
Contents Click the page name to navigate through the document.
1.0 Introduction ...................................................................................................... 2 1.1 1.2
Background ........................................................................................................................ 2 Where Can I find Out More? .............................................................................................. 2
2.0 Climate Change Due Diligence ....................................................................... 3 3.0 Impacts of Climate Change on the Supply Chain ......................................... 5 4.0 Business Resilience to Climate Change........................................................ 6
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1.0
Introduction
1.1 Background
1.2 Where Can I find Out More?
Our climate is changing and the most immediate impact is likely to be seen in the form of more frequent extreme climate events such as droughts, floods, storms and cyclones. The Intergovernmental Panel on Climate Change (IPCC) reports in 2012 and 2014 provide clear evidence that a changing global climate has already affected the magnitude and frequency of some climatic extremes.
For more information about climate change adaptation or how CRA could support your organisation, visit our Climate Change Adaptation and Mitigation webpage to find out more about our capabilities in this area.
The articles contained in this ebook outline the growing importance of climate change adaptation in business, and explains the measures organisations can take to ensure they are prepared for the growing number of challenges climate change will pose. This ebook covers:
To enquire about any of the subjects raised in these articles, or to find out how CRA may be able to help your organisation, contact Bryan Hughes at bhughes@cra.co.uk or 0151 207 7848.
Climate change due diligence in business; Impacts of climate change on the supply chain; and Business resilience to climate change
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2.0
Climate Change Due Diligence in Business
Climate change is affecting the way in which the world does business, particularly since industry is always looking how to address new environmental legislation. In addition, stakeholders in a business are demanding greater action on climate change, particularly as more stringent public disclosure standards are introduced. A heightened awareness of climate change and how business organisations are managing the issue, is leading to increased interest in the risks associated with a changing climate. Ensuring climate change risks and opportunities are properly assessed in the context of corporate mergers and acquisitions (M&A); Joint Venture (JV) arrangements; property transactions; business relocations; introducing new or alternative technologies and undertaking other commercial decisions will become increasingly important. In many instances the business case for adapting to climate change is not straightforward and can be challenging; especially when determining longer term impacts and considering uncertainties. However, progress is being achieved and a number of learning points have been identified; for example by the Institute of Environmental Management and Assessment (IEMA) in their joint guidance with the Department for Environment and Rural Affairs (DEFRA) and the Environment Agency (EA) for Environment and Sustainability Practitioners [1]. Over the past few years, those involved in risk management have been looking at climate change models as a means to try and ascertain the business risks posed by mainly abnormal weather patterns. More recently a new area of risk management has been emerging which is designed to assist those businesses and individuals who are seeking some level of surety that organisations (in which they are investing, financing or acquiring; in part or as a whole) are managing their carbon issues responsibly and adequately.
This area of risk management is known as climate change due diligence and increasingly it is becoming an essential part of liability and climate change risk management. Considered to be another aspect of environmental due diligence, climate change due diligence involves a systematic evaluation of an organization's greenhouse gas (GHG) management process. Organisations who routinely make financial investments, consider the level of risk they might be exposed to and the level of residual risk they are willing to mitigate or endure. Those who include potential environmental liabilities in their investment decision-making will need to judge whether the risks associated with a changing climate fall within their key indicators, for example return on investment (ROI) and their budget constraints of capital and revenue expenditures. It will also be important to understand the life expectancy of new and existing assets within a changing climate, including the potential costs for asset replacement and the depreciation of the business features being considered. Legislation can also play a part, for example the risk of pollution from flooding associated with increasing rainfall levels. In terms of potential environmental liabilities, due diligence auditors who are looking at climate change issues on behalf of a client will need to understand an organisation’s view of commercial risk, the level of materiality or significance that they are willing to accept in terms of risk and the levels of available expenditure, particularly in terms of Capital costs. It may also be important to judge the potential life of the asset and forecast costs of depreciation for the business elements being reviewed and within the context of the risks being assessed. Increasingly, the risks associated with a changing climate will have to be assessed as a part of the investment planning process, methods for financing
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The Importance of Climate Change Adaptation in Business or the acquisition of businesses and/or sites. A changing climate will almost certainly attract some significant adaptation costs that will need to be factored into investments, project financing and M&A assignments.
planning. As a result, the process of due diligence will appraise and assess risks from climate change
It is clear that an understanding of climate change risk will play an important part in future business
[1] Climate Change Adaptation, Building the Business Case – Guidance for Environment and Sustainability Practitioners, prepared jointly by IEMA, DEFRA and the EA.
and due diligence auditors will play an increasingly important role in assessing those risk scenarios.
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3.0 The Impact of Climate Change on the Supply Chain The impacts upon supply chains from adverse weather events were missed from the IPCC assessments in 2012 and only touched upon in 2014. These included the breakdown of infrastructure following extreme weather events; the disruption of food production and supply; and the impact on communities that depend on threatened ecosystems.
interactions between them and the rapid dynamics of volatile markets needs to be understood. There are strong financial incentives for developing climate resilience. For example it is understood that the cost to the economy resulting from the summer floods of 2007 in England and Northern Ireland was ÂŁ4 billion and the snow of early 2011 cost an estimated ÂŁ600 million per day [2].
The changing climate and its resulting impacts, including the increasing severity of storms, floods and weather disasters and the increasing frequency of landslides and sinkholes will test ability of businesses to maintain commercial supplies in products and services. Direct impacts might, for example, include the security and scarcity of supply; in particular materials sensitive to temperature change or processes requiring large volumes of water. Other direct impacts may be general working conditions, product and raw material storage and the anticipated shelf life. Beyond direct impacts, companies will need to understand how a changing climate will affect their most vulnerable stakeholders; the poor, those who live in developing countries and those who will become more at risk from drought, disease, and also as a result of migration.
Organisations of all sizes are also becoming increasingly more interdependent with one another; primarily due to the globalisation of markets and supply chains that provide the direct and indirect exposures to risk and opportunities. Such links in world markets mean that extreme weather events in one location can have repercussions elsewhere. These could be through constraints in natural resources, interruptions in manufacturing or logistical arrangements, or action driven by financial or economic crises that can be independent of government and global commitments to climate change and at times appearing optimized or compromised.
The unanticipated and sudden impacts on global trade, from extreme weather events, are the most disruptive, whereas gradual change can be foreseen and easier to adapt to i.e. adaptation. Being prepared for future changes in climate is an important part of business planning, whether through incorporating climate resilience into business practices or making the most of business opportunities (see later newsletter article). The influence of climate change on the flow of materials, communications and energy, including the
Some companies are already seeking to understand their exposure to risks from climate change and also what opportunities a changing climate may bring. Once there is that understanding, opportunities and risks can be then introduced into business planning and decision making. The role for an organisation might be to prepare not only its assets and operations for a changing climate but to also consider offering novel solutions to others who are also impacted. [2] Federation of Small Businesses
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4.0 Business Resilience to Climate Change It is now widely accepted that our climate is changing, evidenced by the extreme weather events the UK alone has experienced in more recent years, and that the associated economic impacts of these changes are ever increasing. The floods of 2007, for example, cost UK businesses around £740 million [3], whilst the cost of clearing up after this winter's floods and storms are estimated to be nearer £1bn, and the 2003 heat wave was estimated to have cost the UK economy £500 million [3]. The extreme weather events the UK has recently experienced, excessive rainfall and associated flooding, storms and high winds, extremes of temperature, and snow and ice, have resulted in a wide range of impacts on businesses including: Damage to property, raw materials and goods; Logistics and supply chain disruption – delivery of raw materials, fuels, etc. to site and delivery of goods and services to customers; Ability of staff to travel to and from their place of work safely and with ease; Availability of suitably qualified staff; Maintaining workplace comfort levels i.e. the provision of adequate heating during cold conditions and cooling during hotter conditions; Impacts on utilities - interruption to power and fuel supplies, impact on drainage and water supply; IT, data access and data storage issues; Maintaining legal compliance (environmental, health & safety, corporate, etc.); Water scarcity; Inflated insurance premiums; etc.
To minimise the impacts of climatic change and to ensure long term performance, a business must have the ability to resist and plan for such threats i.e. become resilient. In order to ensure resilience it is essential to understand the impacts, negative and positive, climatic change could potentially have on all aspects of a business. From here a business recovery plan can be developed; such a plan is essential to ensure procedures and systems are in place to enable a business to withstand the impacts of climatic change in the short and long term; this must be a dynamic document which is regularly reviewed and updated as part of the continual improvement process. Measures to resist climate change can be low cost and implemented easily in the short term, whilst more costly measures may need to be planned into the business financial forecast and phased in; the adoption of a risk-based approach will inform the decision making process. Economists have estimated that across Europe for every £1 spent on increasing resilience now could yield £4 in damages avoided [4]. The following example clearly demonstrates the financial cost flooding can have on a business and the importance of developing a recovery plan. Plantool Ltd, a tool hire company, was affected by the heavy rainfall in June 2007 which caused flooding of one of its depots. The floodwaters caused damage to equipment & tools stored on floor, the gas and electricity supplies were cut off, and the computer and phone systems were down. The situation lasted for days, and the clean-up, including drying out period, took 9 months. The business did not have a disaster recovery plan in place as flooding not previously occurred. The economic impact was significant, turnover fell by 70% over night and closure of the depot was considered. In total it took over 13 months to get the depot fully operational and over 2 years after that before trade was back to where it had been prior to the flood.
[3] The Sensitivity of UK Manufacturing Firms to Extreme Weather Events, July 2011 [4] http://media.claspinfo.org/sites/default/files/Weathering%20the%20Storm%202014.pdf
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