As the immediate and longer-term impacts of extreme weather events become increasingly unpredictable, organizations need to find new ways to build resilience. This is especially true for energy procurement and sustainability, as risk management becomes a central variable in decision-making at the leadership level. The business imperative to not only align behind an agreed-upon risk management strategy but then to adapt that strategy in real-time while remaining aligned is becoming even more difficult.
Investors and customers alike recognize the undeniable effects of climate change and extreme weather events. And external pressures to drive change can no longer be ignored. Global warming that leads to resource scarcity is a major global threat as environmental changes inevitably affect some facet of every business’s operations.
What’s the risk?
Global warming, extreme weather events, and resource scarcity trends are interconnected. They combine to amplify risks for future food, water and energy demands. Consider:
- Extreme weather caused by climate change impacts the seasonal availability of water and intensifies both flood cycles and droughts. This, in turn, reduces agricultural productivity and causes global food production to decrease by 2% for every decade of warming.
- Meanwhile, at the other end of the spectrum, intense flooding cycles – recall the devastating floods we’ve witnessed very recently in parts of Europe and Asia – lead to near-incalculable loss of property, productivity, and - more importantly - significant loss of human life.
- The energy needs and costs of raw material extraction are becoming more acute. Consequently, price volatility levels for metals, food, and non-food agricultural output in the first decade of the 21st century were higher than any single decade in the 20th century.
These pressures are set to intensify over the decade as the impacts from global warming and resource scarcity increase, and the demand for food, water, and energy grows. Investors and consumers are also demanding more transparency from companies. Global asset manager Aviva Investors recently warned more than 1,000 companies that they face shareholder backlash if they fail to publicly disclose the risks climate change poses to their business models. And Blackrock has consistently urged in its annual letter to CEOs that companies must assess, act on, and consistently disclose climate-related risks to better inform investor decision-making.
What’s the impact?
Global warming and resource scarcity will affect companies in many ways:
- Physical impacts, such as an increase in raw material costs, energy price spikes, resource scarcity, or asset damage caused by extreme weather often carry direct financial implications that can be significant. These impacts can also affect company employees and consumers, because of the potential for loss of life or property from fires and floods, or through increased rates of disease.
- Systemic impacts, such as required changes in governance, policies, technology, regulations, organizational design, organizational purpose, or the marketplace to address climate change mitigation and adaptation.
- Behavioral impacts, such as changes in consumer demand and buying behavior, employee and community health and well-being, and population fluctuations caused by human migration.
What’s the solution?
There are pragmatic, tangible strategies organizations can deploy, such as scenario modeling, to help evaluate climate-related risks across the value chain. The Task Force on Climate-related Financial Disclosures (TCFD) has developed a framework to help organizations identify and disclose those risks that are most material to their business.
TCFD recommendations have already been integrated into the CDP climate questionnaires, and companies that disclose to CDP will be expected to respond. These questions include new examinations of the resilience of an organization in different climate-related scenarios, including a “2 degrees Celsius or lower” scenario.
Recommendations to build resilience against the effects of climate change and resource scarcity:
- Aspire to align energy efficiency, sustainability, and energy supply goals, as well as data collection and strategies to increase collaboration across teams.
- Implement strategies within your organization that create flexibility from or provide insulation to market volatility generated by extreme weather events.
- Make sustainability core to business strategy and reduce global resource consumption by:
- Implementing efficiency measures and software to maximize and measure reductions in resource consumption.
- Committing to, and implementing, a carbon reduction target through the Science-Based Targets Initiative.
- Actively disclosing emissions and water consumption data to CDP.
- Setting an aggressive target for renewable energy purchasing, such as 100% renewable electricity, and using large-scale procurement to rapidly advance towards this goal.
- Integrating circular economy practices that reduce waste and maximize use of raw materials.
- Exploring DERs, such as battery storage, CHP, and microgrids to increase power resiliency.
- Use climate scenarios like the ones supported by TCFD, such as IEA’s Sustainable Development Scenario, to identify potential impacts to business operations and financial planning and prepare responses to possible futures. Of note: TCFD recommendations are now incorporated in the credit scores of S&P Global Ratings.
- Watch changing legislation in global markets.