April 19, 2014

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The Conundrums of Business Adaptation to Climate Change: Why, and How Much?

IPCC scientist Mark Trexler explains scenario planning for business adaptation to global warming.

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By Dr. Mark C. Trexler

This post in the DōShorts series gives options to businesses for planning for climate change using scenario planning.

The Biggest Unarticulated Issue

In his classic study of business scenario planning, The Art of Strategic Conversation (2005), Kees van der Heijden notes that:

“[M]ost companies . . . have looming somewhere at the edge of their collective consciousness . . . the ‘big unarticulated issue.’ Everybody feels it, it is there, always present, the imminent threat or the un-seized opportunity . . . [S]o vast, so different from Business-As-Usual, that existing management thinking just can't cope.”

The implications of climate change are so large and so contrary to the “business-as-usual” course of society since the Industrial Revolution that climate change is probably the biggest “unarticulated issue” of them all.

It’s particularly challenging for the private sector. Corporate adaptation won’t be limited to the physical impacts of climate change; it also will have to address changing business and policy contexts. For companies focused on DoShort_Climate-changegetting through the next two quarters, however, seeing the business materiality in climate change, much less incorporating it into long-term planning, is difficult.

Scenario Planning for Adaptation

When companies do want to look farther ahead, the problem becomes “adapt to what?” Even pro-active companies are so unsure of what the future holds that they can remain stuck in neutral. That doesn’t have to be the case; corporate adaptation efforts can successfully advance even in the face of uncertainty.

Unfortunately, business uncertainties keep many companies from seriously thinking about climate change at all. That’s where scenario planning comes in. As van der Heijden notes:

“If properly developed and institutionalized, a set of scenarios can be the institutional ‘memories of the future’ to help organizations perceive their environment. … using multiple storylines to encapsulate learning is powerful.”

Pioneered by Shell some 40 years ago, scenario analysis remains widely misunderstood and under-utilized in most business sectors. Scenarios help us escape from pre-conceived (and usually wrong) notions of what we “want to be,” or what we think “will be,” and instead consider what “could be.”

Scenario Planning: The Devil's in the Details

Even then, companies that do develop scenarios commonly combine them into a single “most likely” scenario. It’s easy to see why that is attractive, since it “tells” the company what future to prepare for. But it runs contrary to the point of developing scenarios in the first place, which is to open the decision-making process to consideration of alternative futures.

Compounding the problem is that, in generating the “most likely” scenario, a company is almost certain to settle on a forecast that implicitly supports (or is at least consistent with) the path the company is already on. Corporate planners are understandably reluctant to come up (much less publicize) a “most likely” scenario that suggests their employer is on the wrong path.

This is a huge problem for climate change adaptation, since what “could be” or even what “is likely to be” is so dramatically different from what most companies explicitly or implicitly assume “will be.”

Four Possible Climate Risk Scenarios

In the face of this cognitive dissonance, can climate risk scenarios help companies frame the business risks andclimate-change-puzzle opportunities of future climate change and climate policy? In a recent strategic planning exercise with a Fortune 100 company, we developed four climate risk scenarios that successfully helped participants think about what “could be,” rather than staying focused on what “will be.”

Climate Risk Scenario 1: Business as Usual – Stay the Course

Climate change progresses as climate models currently anticipate. Average global temperatures rise by 1.5oC by 2050, and average global sea levels by .33 meters. The difficulties of achieving a coordinated international response to climate change prevail; the limited policy measures that are undertaken have little impact on climate trends.

Climate Risk Scenario 2: Accelerated Change – Lagging Policy

Climate change accelerates in line with recently observed trends. Average global temperatures rise by 2.5oC by 2050, and sea levels are .66 meters higher. Climate change “tipping points” including an ice-free Arctic have accelerated the rate of change. A coordinated policy response still fails to materialize, even as adaptation needs grow rapidly.

Climate Risk Scenario 3: 2020 Climate Policy Response

Climate change accelerates as per Scenario 2, but a steadily worsening series of climatic events led by Hurricane Sandy in 2012 causes the politics of climate change to shift. A material climate policy response takes hold in in 2020. Draconian emissions reduction measures are imposed to limit the possibility of runaway climate change by 2100. A carbon price of $75/ton CO2e is imposed in the electric sector, and $150/ton in the transportation sector.

Climate Risk Scenario 4: 2040 Climate Policy Response

Climate change progresses as per Scenario 1, but a global policy response is triggered in 2040 when it becomes obvious that climate change will have catastrophic impacts during the second half of the century. By 2040 GHG emissions have grown substantially from current levels, and significantly more climate change is “in the pipeline.” The policy response is therefore more draconian than in Scenario 3, with a carbon price of $125/ton being imposed in the electric sector, and $250/ton in the transportation sector. Geoengineering options are also fast-tracked.

Corporate Risk from Climate Change

These are just a few of the almost infinite range of potential climate change scenarios, but they seem to effectively book-end corporate risk.

We can’t truly know the future when it comes to the rate of climate change, the corporate-risk-climate-changedegree of climate change impacts, or the nature of resulting domestic and international policy. But as long as GHG emissions remain an economic externality, and climate policy does not reflect the true risks of climate change, changing business contexts are inevitable.

Integrating consideration of a range of climate change and climate policy scenarios into business strategic and risk management thinking is one way for companies to show stakeholders they’re taking the issue seriously, and to reduce the risk that stakeholders will be left holding the bag of the willful blindness that is so common right now.

About the Author:

Dr. Mark Trexler (@ClimateRoulette) has worked with companies around the world on climate change risk perception and management, from carbon markets to adaptation. He is widely published on these and other issues, and has served as a lead author for the Intergovernmental Panel on Climate Change. His latest book Adapting to Climate Change: 2.0 Enterprise Risk Management is part of the DōShorts Sustainable Business Collection published by Dō Sustainability (2013). CSRwire readers can use code CSR15 to save 15% when ordering from the publisher here.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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