Creating Climate Resilient Organisations

Observed changes in temperature, as well as the frequency and intensity, of extreme weather events indicate that climate change is already occurring.[1] However, discussions of how the impacts of climate change will affect business, especially those in vulnerable sectors such as insurance, funds management or primary production, are still in their infancy. In my new book, The Climate Resilient Organization, I consider what actions business can take to evaluate their adaptation needs and strengthen their resilience.

Why should businesses be concerned?

We now have a large and increasing body of scientific evidence that clearly shows that climate change is already here, and posing very significant threats to economic development and our society.[2] Statistics from the insurance and reinsurance industry show increases in damages from weather extremes.[3]^,[4]  The impacts of climate change are very likely to become more in the future, particularly if there are no significant cuts in the emissions of greenhouse gases. [5]

How will climate change affect businesses?

Gradual increases in temperature are expected to lead to a significant warming over time. Even more concerning are the increases in climate volatility and changes in extreme weather events that climate change will bring.[6] Increases in climate extremes such as storms, flooding and droughts are likely to be more damaging than rising temperatures alone[7]

Even in industries where companies sustain no direct damage (such as fund management, for example), they are likely to be significant follow-on effects resulting from increasing investment risks in climate-change and carbon-exposed assets.[8]^,[9]

Evaluating adaptation needs

Two courses of action are available, which include (1) the mitigation of greenhouse gas (GHG) emissions to try to prevent further climate change, and (2) adaptation measures to survive and thrive under different levels of climate change. Adaptation is thereby a process of ongoing adjustments to extend the “coping range” of an organisation – defined as the amount of climate impacts that a business can tolerate without adverse effects. While these options look like they are at opposite ends of the spectrum, in reality we need to do both. Even with the most stringent efforts to reduce GHG emissions, the impact of climate change cannot be completely avoided over the next few decades.[10]

To be able to adapt successfully, the challenge for business is to understand both their coping range and the range of adaptation options available, including the protection, relocation and diversification of corporate assets. This includes the need to:

• evaluate and account for current and future climate impacts,
• identify priority areas for adaptation, and
• evaluate the costs and benefits associated different adaptation options.[11]

Companies can thereby draw upon relatively simple techniques such as calculating the Net Present Value of their investments in adaptation (factoring in losses avoided), or employ more sophisticated techniques such as Real Options Analysis (a technique originally used for the analysis of financial options) which factors in the value of flexibility and opportunities.[12]

Who should lead the way – government or the private sector?

The public sector, especially local governments, are important drivers behind climate change adaptation as they can guide land use planning or disaster management. The private sector, on the other hand, can react based on climate and market signals. Going forward, the challenge will be to coordinate public and private adaptation approaches, and to also assess the level of adaptation needed – both to avoid a lack of preparedness as well as maladaptation. Examples for maladaptation include adaptation efforts that have unintended consequences and increase vulnerabilities, for example due to large-scale commitment of capital and institutions to trajectories that are difficult to change and create inflexibility.[13]   

So how should companies go about planning their response?

UQ Business School has been working with companies since 2005 to develop strategies on climate change and management.

This year, we have launched our new Executive Education course titled “Finance and the Global Environment” which systematically explores the potential impacts of global environmental changes and the risks these changes present to business. Climate change, sustainability and the environment are no longer factors which exclusively concern government agencies, not for profits and environmental lobbyists. With science demonstrating the increased loss of biodiversity, rising sea levels and frequent weather extremes, businesses are more actively embracing the need for environmental resilience and organisational adaptation strategies.

We work with executives to develop a case for action on climate change and discuss the path forward – including examining the consequences of environmental change for their business, and working through a valuation framework to reduce the impacts of environmental change on their assets, resources and most importantly, the bottom line.

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