Continuing along the same lines of earlier blog about climate change risk management and adaptation tools, I would like to share highlights from the Organization for Economic Co-operation and Development (OECD)’s Private Sector Engagement in Adaptation to Climate Change: Approaches to Managing Climate Risks. The authors examine the private sector’s progress in adapting to climate change by considering information from sixteen case studies drawn from a range of industries across the private sector as well as information gleaned from the 2009 Carbon Disclosure Project (CDP) questionnaire. The paper explores what motivates a company to act on risk exposure as well as which factors can affect a company’s incentives, capacity, and perceived need to adapt to climate change. It also looks at the role of the government in enabling and encouraging the private sector to take action on climate change adaptation. I found the report’s findings insightful, especially the following highlights.
The risk exposure that companies face can be direct or indirect. Risk can come in many forms, including: physical (e.g. damage to infrastructure), supply chain and raw material (e.g. water scarcity lowers production), reputational (e.g. reduced product quality), financial (e.g. loss of value), product demand (e.g. shift in product selection), regulatory (e.g. water conservation requirements) and litigation (e.g. increase defaults). The type and severity of risk a company faces depends on its operations and sector (e.g. goods, services).
The authors of the paper describe a study that was based on a three-tier framework evaluating companies’ actions in terms of their risk awareness, risk assessment, and risk management. Each successive level builds on the results of the preceding one. The paper provides examples of steps taken by companies for each tier described in the report. It is worth noting that companies may choose not to openly discuss investments, strategies, and efforts to address adaptation as these efforts can be considered a business advantage that should not be publicized.
Risk awareness is broken down further into categories:
- Recognition of climate change risks: most companies recognize climate change risks.
- Engagement in national dialogues or international negotiations: a quarter of companies have engaged in some international or national level dialogues on climate change.
- Internal training on raising awareness: some companies utilize their websites to demonstrate or raise awareness of climate change risks. Other vehicles (e.g. children’s books or competitions) can be effective.
- Campaigns to raise awareness: many campaigns target employees as a means of preparing for natural disasters and emergencies.
Most companies assess risk using their own tools and frameworks, resulting in variations in risk assessment detail and approaches. Companies tend to focus on current and short-term risks that have direct impact on their business, such as damage to assets and infrastructure. Assessing long-term climate risks involves the use of scenarios and projections that require specialized skills not commonly found within a company.
The authors of the paper note that most companies have only implemented risk management (adaptation) measures that are driven by other benefits to the company or its operations while also improving resiliency to climate change. Examples of these measures include addressing water scarcity, promoting sustainable agriculture or shifting products as a result of changes in consumer demands. A few companies, namely those that rely on long-term assets (e.g. water and energy providers, mining), have taken measures that are specific to climate change risks.
When reviewing these results, I concluded that despite a high level of awareness among companies that climate change poses risks, not all of them believe they are vulnerable to such risks. The risks that are addressed more often are those related to extreme weather events rather than gradual climatic shifts. While two out of five companies surveyed have conducted risk assessments, only one third have invested in adaptation measures such as infrastructure. Still, some companies have begun the process of working to minimize risks by engaging in a certain level of activity, such as integrating climate risk into standard risk management or planning processes.
The study discussed in the report found that several factors, including capacity, incentives and perspectives, can motivate or discourage a company’s level of adaptation efforts. Let’s take a closer look at what those factors mean.
Capacity: This term refers to a company’s in-house capacity and expertise that better enables them to assess and develop responses to risks, as well as to their ability to finance adaptation measures.
Incentives: Uncertainty about how climate risks will impact a company’s operations or supply chains will reduce incentives to invest in adaptation measures. Additionally, buyers that can shift production to different regions with minimal business impact are less inclined to invest in adaptation measures. Policies and regulations may be necessary to stimulate investments, especially for long-term solutions that are justified in short-term business planning.
Perspectives: Companies that have suffered from extreme weather events or natural disasters may be more likely to invest in adaptation measures. Articulating the benefits of investments – not simply risk avoidance – may improve the likelihood of adoption.
The researchers framed possible adaptation strategies in six categories:
- Preventing losses: reduce exposure to climate impacts
- Tolerating losses: accept losses where it is not possible or cost effective to avoid them
- Spreading or sharing losses: distribute the burden of impacts through insurance
- Changing use or activity: shift resources or activities to those better suited to climate change
- Changing location: move to locations that are less vulnerable to climate change impacts
- Restoring assets: restore assets to the condition they were in prior to being damaged
The private sector can play a key role in ensuring companies have the information they need to assess and address climate risks as well as provide risk management guidance and tools. This paper is a good resource to any company interested in using tools to address climate risk or promoting a collaborative approach to developing climate adaption measures.