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Why climate risk management needs to be at the top of the business agenda

Why climate risk management needs to be at the top of the business agenda
Dec 3, 2020
Companies need to prioritize their response to climate change—to build resilience and drive business value. 

Climate change has been a frequent topic of discussion in recent decades. While the negative impacts are well known, there are opportunities for organizations that embrace climate risk management as a discipline.

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Peter Schultz Headshot

We sat down with Dr. Peter Schultz, vice president of climate and resilience at ICF, whose industry expertise spans over 20 years in climate and global change research, management, decision support, and communication—to discuss climate risk management and what companies can do to proactively address climate change as it progresses. This interview has been edited and condensed for clarity.

Q: Climate risk management may be a new term for some of our readers. Can you walk us through what it is, where it came from, and the evolution of this discipline?

A: The climate change discussion goes back more than 100 years. For most of the past century, this has mainly just been a topic of scientific investigation. However, fast-forward to today, we are now focusing on businesses and the impacts of climate change on revenue and profitability. It's similar to how companies think about weather risks on the timescale of a couple of minutes—for example, trying to understand how that storm that's just over the horizon might affect operations. It’s just that now we go out to a longer time horizon.

Thinking about climate change is critical for companies and governments building infrastructure that lasts a long time. Sometimes, these entities build infrastructure with a design life of a few decades, but it turns out that it often stays there much longer, like new roads. From that point of view, we need to look very long-range out into the future to think about how climate change could affect the infrastructure that our clients are putting in place.

Q: In your recent Smart Cities Dive article, you talk about how a company’s response to climate change can be a strategic driver of value. Can you elaborate on that?

A: Science indicates that globally there will be far more downsides to climate change than upsides, but it would be remiss of companies and governments not to think about upsides where they may exist. We work with natural resource companies where the growing season is getting longer. They may have an opportunity to add an additional planting cycle due to the changing climate. There are also opportunities for outdoor construction. Early spring working season is coming earlier, and the late fall working season is extending, though there are increasingly limits associated with outdoor work in extremely hot climates.

There are also opportunities of a different type for companies selling things that can increase the resilience of other companies or governments. Think about companies that sell technologies to prevent flooding or companies developing tech to reduce greenhouse gas emissions. And, of course, there are major opportunities in the renewables industry. When we approach a company, we help them think about both the downsides and upsides of climate change together as a package.

Q: Is climate risk management a management priority? Are business leaders thinking about it enough?

A: Some leaders see the benefits of proactively addressing climate change, but it's still the minority. In sectors that aren’t climate-sensitive, that's okay, but in other sectors, it's not okay from the point of view of protecting a company’s mission and shareholders' interests.

While much of the early consideration of climate change in companies has tended to be around how their greenhouse gas (GHG) emissions affect the world, we're increasingly focused on how climate change affects the company itself. In the early days, corporate sustainability offices were the main, and sometimes the only place within a company considering climate and GHG emissions. But to deal with climate risks and opportunities of the kind we're talking about requires integrating climate risk considerations into enterprise risk management across the company, into corporate governance, and into investments that companies make and hold. The entire company needs to be thinking about climate risks. You can't keep it only within the sustainability office. A company has to make this mainstream company-wide to be effective.

Q: What would you say to corporate leaders who are wondering how to prioritize climate risk management investment against the many other business investments they need to make? And how do you go about measuring the success of your climate risk management investments?

A: We help companies understand how climate risk “racks and stacks” in relation to other risks they face. This requires measuring how climate change has a direct impact on operations, production, and corporate infrastructure. It also requires thinking indirectly about how resilient a company is. Here’s one example that paints a picture: massive flooding in Southeast Asia in 2011 disrupted the production of hard disks, and that flooding disrupted the whole global supply chain for computer production. That same flooding also affected car manufacturers because there were some key parts produced in places that flooded. In light of those supply chain risks due to the increasing severity and intensity of weather extremes, companies are considering how they can diversify and shorten their supply chains to manage these types of risks.

Companies are now thinking about diversification in the context of COVID-19, where there may be some aspect of their operation that’s disrupted because of the way the pandemic has torn things apart. Companies are thinking about how they can be more resilient and less reliant on a single point that could potentially fail and maybe have a more distributed supply chain. We help them think about these things to increase their resilience and ability to thrive in the face of all risks, not just climate risks.

Q: How does the Task Force on Climate-related Financial Disclosure (TCFD) factor into climate risk management?

A: The TCFD was established coming out of the 2008 financial meltdown. One of the risks that the G20’s Financial Stability Board identified was the risk from climate change, so they created the TCFD to reduce the economic impacts of climate risks. We use the TCFD in our climate resilience planning work to frame the way we help companies understand, assess, and disclose risks.

Climate change isn't just a government problem. Governments need to be part of the solution, but unless companies are engaged, we won't have effective action on climate change. It’s great to have a framework like TCFD in place to help motivate and guide companies And, corporate action can often benefit not only the companies themselves, but can also have ripple effects for regular people by increasing job stability and growth. And it can also support governments by providing stability to the tax base. But, corporate action alone is not enough. We need government action as well. So, the two of them together are two-thirds of the solution; the other third is individual action. We like to think about all of those pieces together when we're thinking about climate change and solutions to it.

Q: Obviously, there's a lot to say on this topic, which is why you developed a climate risk podcast! Can you tell readers about that? 

A: Sure. My colleague Brad Hurley and I developed a podcast series to shine a light on the risks and opportunities climate change presents to companies and how they’re able to use an understanding of climate change to their financial benefit. We hope people who are listening to our podcast can come away with a better understanding of how they can manage their climate risks effectively.

For more on this topic, check out our climate risk podcast and read Peter’s article on the case for C-suite engagement on climate risk.

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