Facing the risks of a changing world

Business must now both change and adapt, writes Sara Walton.

Sara Walton
Sara Walton
Adapting to the impacts of climate change has moved up the agenda, as the reality bites.

It will get close to equal billing at the 26th Conference of the Parties (COP26) in Glasgow next month, sitting alongside the work to increase ambition on mitigating climate change with deeper emission cuts.

COP 26, which will run from October 31 to November 12, involves those countries who have signed the UN Framework Convention on Climate Change. Which is most countries. The focus of the conference this year is the Paris Agreement and its aim to cut emissions to net zero by mid-century and keep temperature rise to between 1.5degC and 2degC. All countries have been asked to submit new goals and plans involving deeper emission reductions, while the conference will also complete work that COP 25 was unable to finish and will formulate plans for adaptation.

It is hoped the talks might put the world on a path towards meeting the Paris Agreement targets.

Aotearoa New Zealand is sending a small contingent with Minister for Climate Change, James Shaw.

In Aotearoa New Zealand we are starting to see mitigation efforts, actions to reduce emissions. These include businesses changing the way they do things.

Being better informed to prepare for climate change has become essential because there is considerable organisational risk associated with responding to its impacts.

For about 200 publicly listed companies and large insurers, banks, non-bank deposit takers and investment managers there will be mandatory climate-related reporting. Such reporting will help identify risks for investors and will help set the scene for business responses to climate risk.

There are two main ways of understanding climate risk. The first are the physical risks. In April this year the Ministry for the Environment compiled the first national climate change risk assessment. It identified 43 priority risks in the areas of natural environment, human, economy, built environment and governance (see environment.govt.nz) and then the 10 most significant risks. These are risks due to sea level rise, increasing invasive species and the economic costs. The risks are to coastal ecosystems, indigenous ecosystems, social cohesion and communities, social inequalities, governments, financial systems, potable water supplies, buildings, and institutional arrangements.

However, it is not just the physical risks that need to be calculated in relation to climate change. There are also transition risks. These are the risks that can occur from maintaining business-as-usual in a system transitioning towards being low-carbon. In other words, what happens when your business doesn’t stay abreast of developments, read the business environment and keep up with impacts from climate change. The key transition risks are policy, liability and technology. These risks can result in regulatory, supply chain, technological or financial changes, or influence reputational shifts that might result in a loss of social licence, for example. As the world makes changes to both mitigate and adapt to climate change, businesses need to be mindful of the many risks this may pose.

In a report produced by McKinsey last year a number of recommendations for climate risk were made. First, organisations should factor climate risk into decision making. Like health and safety, climate change and sustainability need to become embedded into the organisational culture for organisational change to occur. Here are some more recommendations from the McKinsey report:

When building new builds, ensure to build for what was a 1-in-200-year event to future proof.

Consider building resilience into supply chains through back-up inventory and alternative locations and suppliers.

Factor in how difficult it will be to protect assets in certain locations. This could mean retreat, relocation or shortening asset cycles.

Start calculating adaptation choices, e.g., what to relocate and what to protect.

Work with stakeholders on adaptation strategies, as integrating many different perspectives will likely involve better outcomes.

To prevent transition risks, have a decarbonisation strategy that plans how your company will decrease carbon emissions and stay competitive.

Reducing climate risk to your organisation involves starting to measure and manage your emissions footprint today. Putting systems in place to manage the data generation for this task will enable it to be done effectively over the next few years. Reducing those emissions significantly is the harder task for businesses. But when balanced against the risk of not doing anything to transition, businesses cannot afford to not be part of the low carbon economy.

- Sara Walton is an associate professor of sustainability and business at the Otago Business School, University of Otago. Each week in this column, writers address issues of sustainability.


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