Corporate Risk and Cascading Climate Change Impacts: Emerging Triggers for Action

Donovan BurtonClimate Change Adaptation Specialistdonovan@climateplanning.com.au

It is increasingly evident that the issue of climate change impacts has reached a tipping point in the wider corporate world. Although far from being mainstream, and still frequently confused with mitigation, climate change adaptation is increasingly becoming a term in the corporate lexicon.

Set in the backdrop of the reporting on the visually stunning US Third National Climate Change Assessment1 (which frames climate change as a now issue – not a future one), an interesting array of information has emerged in the past couple of weeks. This information is likely to have corporate decision makers diving into the adaptation literature and scrambling to come up to speed with the climate change management issue. Or at least it should have.

Three of the key trigger events are presented below.

The first is a class action; insurers versus local government. The Plaintiffs is Illinois Farmers Insurance, who is seeking redress from approximately 100 municipalities for failing to adequately consider climate change in their stormwater management.2 As well as two negligence claims in the lawsuit the Plaintiffs also present a novel challenge based on the Fifth Amendment of the US Constitution. Regardless of any local government immunity clauses that may dampen the chances of the insurer winning, the cost of defending ongoing litigation in this space will still affect municipal bottom lines.

The second is an announcement from Lloyds, the world’s largest insurance market. Their report expresses the need for incorporating climate change into catastrophe models, especially for projects with long horizons (e.g. infrastructure). They also showed that climate change has already impacted losses stating “the approximately 20 centimetres of sea-level rise at the southern tip of Manhattan Island increased Superstorm Sandy’s surge losses by 30% in New York alone”.3

The final example comes from the global credit rating powerhouse Standard and Poor’s (S&P). In a recent media release S&P state that ‘climate change is a global mega-trend for sovereign risk.’ The S&P report states that the manifestation of the risk is most likely to materialise through ‘economic, fiscal, and external performance’.4 If, as they suggest, climate change is likely to be a mega-trend that will affect sovereign nations it would be a rational deduction that it may also eventually affect the credit ratings of those at a smaller scale (e.g. organisations and local governments).

These three examples show that inadequate consideration of climate change has cascading impacts. In particular they can affect climate legal risk, insurance affordability and the pricing of interest rates. Without a shadow of doubt it is now

“..climate change adaptation is increasingly becoming a term in the corporate lexicon...”

increasingly difficult for organisations to ignore this issue. No longer can the management of climate change impacts exist as a “tag on” to CSR that gets some token recognition but little boardroom discussion. No longer can ill-informed ideologies shape professional responsibility.

The above triggers show that the elephant in the room for organisations is climate change adaptation governance, that is the process of managing the issue. How organisations look at the system from a whole, as opposed to reactive, site and time specific extreme weather events, should now be the focus. It is about informed decision-making, insurance availability and managing climate legal risk. It is about exploring goal-conflict, cascading risks and asking the right questions.

The benefit of mainstreaming the issue comes with early identification of potential rewards associated with climate change. There is no doubt that opportunities associated with climate change are there for the taking. For example there are a raft of potential economic benefits associated with the cascading impacts of a rapidly changing Arctic environment.5 However, to reap any rewards you need to understand the risk and incorporate a system that allows you to keep abreast of the issues as they emerge.

There is an array of risk transfer and management mechanisms available and used by organisations. But these are yet to be tested or proven in the complex world of climate change adaptation. As is increasingly evident, traditional risk identification and transfer is being challenged and surprises are emerging.

You may be able to model the future likelihood and impact of a catastrophe under a changing climate but try modelling for a multi-billion dollar class action associated with ill-informed decision-making. Much harder, but the likelihood now exists. The consequences of which can be just as fatal for an organisation as a shock to a supply chain affected by an extreme weather event.

Understanding the adaptation issue requires a targeted strategy, appropriate resource allocation and a level of sophistication that supports informed decision making in an ever-changing environment.

References

1. Melillo, Jerry M., Terese (T.C.) Richmond, and Gary W. Yohe, Eds., 2014: Climate Change Impacts in the United States: The Third National Climate Assessment. U.S. Global Change Research Program,

2. Sinha, T (2014) Illinois Farmers Insurance Company v The Metropolitan Water Reclamation District of Greater Chicago (A Climate Planning Summary), available from http://www.climateplanning.com.au/blog/2014/5/11/summary-of-the-illinois-farmers-class-action-against-local-government

3. Llyods (2014) Catastrophe Modelling and Climate Change, Available from http://www.lloyds.com/~/media/Lloyds/Reports/Emerging%20Risk%20Reports/CC%20and%20modelling%20template%20V6.pdf

4. Standard and Poor’s (2014) Climate Change Is A Global Mega-Trend For Sovereign Risk, available from https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1318562&SctArtId=237251&from=CM&nsl_code=CMTFRI&sourceObjectId=8606813&sourceRevId=2&fee_ind=N&exp_date=20140520-12:56:41

5. McGuirk M (2014) The Melting Arctic and Speculation on Changes in Transport Infrastructure, available from https://ams.confex.com/ams/94Annual/webprogram/Paper241298.html

Author contact: E: donovan@climateplanning.com.auPh: +61 (0) 435 041 385

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“...the elephant in the room for organisations is climate change adaptation governance...”