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The Next Corporate Imperative: Climate Change Risk Management

By Michele Villa, Director and Global Practices Leader, DuPont Sustainable Solutions

The extreme weather events witnessed this summer in North America, in which Hurricanes Harvey, Irma and Maria devastated areas of the Caribbean and Southeastern US in the span of just one month, are a clear indication that companies should take a closer look at climate change-related risk management – that is, reassessing their approach to managing climate change risks and their consequences.

Severe storms that once were considered 500-year events are now occurring more frequently and with more devastating effects. Before the first of this summer’s major hurricanes, Hurricane Harvey, made landfall near Houston, Texas in August, the last major storm to strike the United States was Hurricane Wilma 12 years ago. The torrential rains produced by Hurricane Harvey, more than 40 inches in many areas over a 4-day period, resulted in catastrophic flooding and an associated price tag for rebuilding amounting to $100 billion by some estimates.

Companies in the path of these storms need to be prepared for interruptions of operations, disruptions to supply chains, extended power outages and damage to infrastructure to occur much more frequently. Those in the heavy manufacturing sectors, including chemical, petrochemical, and oil and production, also need to anticipate the increased potential for storm-related consequences that could impact ecosystems and communities surrounding these facilities, which would worsen the already devastating effects of these weather events.

 

Dimensions of Climate Change Risk Management

When thinking about climate change, companies typically face two dimensions of risk: Risk due to adaptation needs and risk due to mitigation policies. (See Figure 1) Risk due to adaptation needs refers to a company’s ability to withstand the effects of severe weather events, including their impact on facilities and assets, deterioration of materials and goods, etc. Risk due to mitigation policies refers to a company’s response to government policies that are intended to address climate change, including global agreements, federal and state regulations, and local ordinances. Companies with high adaptation risks and high mitigation risks are particularly exposed to climate change-related incidents and developments.

Figure 1. Exposure to Climate Change Risk

Most companies have developed systems and plans to address many climate change mitigation policy risks, particularly compliance with regulations and agreements, because company leaders see the value in reducing greenhouse gas emissions due to the associated cost-savings and reputational benefits. However, the same attention is rarely given to addressing adaptation risks.

This could possibly be because climate change adaptation risk management inherently involves anticipating risks that could occur in the long term, as opposed to the urgency associated with managing risks that could occur on any given day in a facility. Also, the analysis of the likelihood of incidents occurring or reoccurring, which is a critical exercise necessary to prioritize where to make investments to mitigate risk, often does not take into consideration changing weather patterns as an effect of climate change. Finally, certain adaptation risks are often downplayed or assessed based on old data that is not consistently updated.

Despite these justifications, the potential catastrophic consequences of any extreme weather event (including the potential loss of life) should by themselves justify adequate planning and investment to mitigate the impacts that could result to a company’s facilities and operations.

 

Mitigation Efforts

When companies begin the process of managing their climate change risk, they should endeavor to pursue a holistic approach toward fully understanding and assessing all the associated risks to their operations, whether financial, operational or reputational. Unfortunately, this is oftentimes easier said than done. It can be common for companies to respond to specific risks or incidents with more procedures and more documentation. Organizations tend to focus their energy on managing operations, incidents and emergencies rather than recognizing risks, the conditions in which they occur and taking steps to mitigate them. (See Figure 2)

Figure 2. Technical Model for Managing Climate Change Risk

Recognizing potential risks requires an understanding of how they impact assets and operations. This risk determination provides a fundamental basis to differentiate potential risks by level of severity and by likelihood of occurrence, and then allocate resources accordingly based on these two factors.  If the risk is higher, then there is an obvious need to have more layers of protection and detailed plans in place with the corresponding allocation of time, money and resources. Once a system of controls is developed and in place, risks should be continually reassessed based on updated data and changing perceptions.

 

But sustaining these climate change risk mitigation systems across a company is no easy task.  Companies need to adopt an integrated approach (see Figure 3) to their business processes to effectively and efficiently implement these risk mitigation activities on a consistent basis.  An integrated approach links critical elements, including:

 

  • Process management (establishing the right strategy, governance and key performance indicators, developing an organizational structure to support processes, and monitoring performance to be more resilient to climate change developments);
  • The technical model (the specific tools and procedures to better understand, review and update climate change-related risks to the company);
  • A capabilities engine (the training and coaching necessary to provide employees the right skills and collaborative mindset to implement the best solutions);
  • Mindsets and behaviors (motivating employees, changing behaviors and encouraging individual ownership of results through the active participation of corporate leadership, from C-suite executives to the critical level of first-line management, to reduce climate change-related impacts).

 

Figure 3. Integrated Approach Toward Climate Change Risk Reduction

Like it or not, climate change is emerging as a risk that corporate leaders would be wise to take seriously. As we have seen, policies relating to climate change are not necessarily fixed in stone and can vary as politicians come and go, which makes it even more important for companies to assess and re-evaluate their response to these policies. And as significant weather events occur more frequently and with more severity, companies face an increased likelihood of disruptions to their operations. Those organizations that make climate change risk management a priority will be more resilient and better able to withstand its effects.

Michele Villa is Director, Global Practices Leader and Australia & New Zealand Regional Leader for DuPont Sustainable Solutions. DuPont Sustainable Solutions is a leading provider of world-class operations consulting services to help organizations transform and optimize their processes, technologies and capabilities. DuPont Sustainable Solutions is committed to improving the safety, productivity and environmental sustainability or organizations around the world. Learn more about DuPont Sustainable Solutions at www.sustainablesolutions.dupont.com.

 

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