20. 03. 2018

Addressing Carbon Risks - Here and in New Zealand!

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Just back from another trip to New Zealand – a different country from when I was last there a year ago, transformed as it is by a change of Government!

To everyone’s surprise, the National Party failed to win enough seats in last year’s General Election to stay in power, enabling a coalition of Labour, the Greens and New Zealand First to form a new Government, under the inspiring leadership of Jacinda Ardern as Prime Minister.

One of the first decisions they took was to announce a new Zero Carbon Act. The National Government had done as little as it could get away with over the preceding nine years, so there’s a lot of catching up to be done. The Act will be underpinned by the appointment of a new Climate Commission, very much along the lines of the UK Committee on Climate Change. This is all being driven through by James Shaw, Leader of the Green Party, and now Minister for Climate Change.

New Zealanders are much more alert to the impact of climate change than citizens in many other countries. While I was there, the tip of the North Island was experiencing the fifth tropical cyclone in just a few months, way outside the ‘normal’ frequency of such extreme weather events. The Tasman Sea has been more than 4oC hotter this year than on average.

In January, the Chief Executive of New Zealand’s Insurance Council warned that New Zealand was particularly vulnerable to extreme weather, suggesting that the cost from such events could exceed $1.5bn every year. That may not sound much, but New Zealand is a small country, and that amounts to nearly 1% of its GDP.

Forum for the Future has a number of cracking Partnerships in New Zealand, including Air New Zealand (where I chair an amazing international Sustainability Advisory Panel), Fonterra (the biggest dairy company in the world), Vector (a wonderfully ‘on it’ energy company, intent on disrupting the entire energy system!) and New Zealand’s biggest port, Ports of Auckland. All of them are very aware of their respective carbon challenges, which, in the case of both Air New Zealand and Fonterra, are huge.

But that’s not necessarily true of New Zealand companies as a whole. On my last day, I gave a talk at the NZ CFO Summit, focussing on the growing pressure on all companies to start reporting to investors on their exposure to carbon risk. Not at all sure how well my rather stark warnings were received!

A lot of companies, both here and in New Zealand, just don’t know where to start with this whole climate risk story. So my good Forum colleague, Iain Watt, has been working on a comprehensive risk framework, plus a set of simple Ground Rules, for precisely that purpose. And this is how it works:

“In the summer of 2016, I blogged about Forum for the Future’s emerging thinking on climate risk and shared the first version of our ‘wedge-and-circle’ climate risk framework (which we use to build corporate and investor awareness of climate risk).

This framework not only illustrates the wide variety of risks that climate change poses (the wedges), but also highlights the fact that these risks do not just apply to corporate assets and operations, but also to supply chains, markets, and the public infrastructure – and even the social cohesion – upon which all companies rely (the circles).

Well, we have now come up with an updated version:

So what’s changed?

Well, firstly, we think the new version looks a lot better (and is a lot less cluttered)…

More substantially, we’ve given more prominence to the physical risks of climate change – and we’ve created space to explicitly consider the potential for climate change to result in shifts in climate patterns, as well as the ‘deviations around the norm’ that typify the current impacts of climate change.

We’ve made this change this because, if we cross the 2°C threshold (and perhaps even if we don’t) then ‘disruptive shifts’ in climate patterns are, alas, a possibility.

It is, of course, impossible to accurately predict how and when such Rumsfeldian unknown unknowns might manifest. And, in a worst case scenario, such shifts could be civilisation-threatening, never mind disruptive to a corporate business model. But it’s important that such possibilities are at least ‘in the mix’ when discussing climate risk – if only to help make the case that any company that wishes to truly protect itself should be pulling out all the stops to ensure we don’t cross the 2°C threshold.

Beyond these changes, our ‘ground rules’ for any company that wants to think through its exposure to climate risk still stand:
1. Climate change will not only impact corporate assets and operations – it will also impact supply chains, markets, workforces, and the broader infrastructure upon which they depend.
2. It is important to consider the widest possible range of impacts, including low-probability outcomes with potentially large consequences.
3. As well as posing discrete risks of its own, climate change will interact with and exacerbate other risks (e.g. relationships with government and/or commercial partners, or the availability and efficiency of labour).
4. Current climate impacts/trends are not a reliable indicator of impacts-to-come – the future will be more disruptive, and will include ‘surprises’ as well as trends.
5. The corporate approach to climate risk must therefore be dynamic and adaptive.
6. Climate change poses significant enough risk to mandate regular consideration and discussion at senior management and board level.
7. A consideration of climate risk must be built into standard business management processes and embedded across all corporate divisions (i.e., it cannot be the sole responsibility of the sustainability team).
8. No one company acting alone can truly ‘protect itself’ against climate risk. Partnership and collaboration – pre-competitive, in and across industries, and with government and communities – will be key.

And we remain keen, and ready, to work with you to explore these risks in more detail.”
[Originally posted by Iain Watt, Principal Climate Change Specialist, on Forum for the Future's website, here.]

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