Climate change challenges

Managing Risk is about investing knowledge into future events. It is therefore preferable to anticipate future risks for action to protect the business, rather than attempting to overcome unexpected challenges when they occur.

Climate Change is a challenge receiving increased media attention, but with varied responses from politicians and business. Climate Change impacts are associated with rising average global temperatures, influenced by greenhouse gases produced from:

• Combustion of fossil fuels in power generators (mainly electricity)
• Natural gas, petroleum and chemical industries
• Transport emissions
• Building: design, construction and power consumption
• Industrial processes and
• Agriculture (including the loss of forests)

The advice from scientific advisers is that to hold an increase of 1.5 degrees by 2050 requires developed countries (the largest emitters) to achieve zero emissions well before that date. Unfortunately, 2050 is far into the future, so for many people there are no immediate concerns.

However, the 2050 goal requires substantial action prior to 2030 from all sections of societies, including business organisations. Action is required in mitigation (limit additional greenhouse emissions) and adaptation (“action to prepare for and adjust to new conditions…”)

To mitigate the effects of climate change requires each nation to implement a climate change policy that identifies how the 2030 and 2050 goals will be attained. It is not sufficient to focus just on incremental reduction in energy consumption by business and consumers, through energy efficiency and the use of renewable energy.

Combined with Mitigation action, organisations need to plan for Adaptation. This is because climate change is a ‘Known-Unknown’. We know the risk of climate change exists and its likely scope by region, but the consequences for any organisation are not known. For example, how events in one industry or business could randomly affect the factors of demand and supply in other industry sectors that supply your business. As a Complex Adaptive System the outcomes will be emergent results from within your Supply Network.

Climate risks in your supply chains

For most risks in business, the probability of events occurring and the likely consequences can be identified; however, climate change has no recent history to be evaluated. The likelihood of global temperatures exceeding 1.5 degrees is based on climate models, but the consequences for any business can only be guessed. Some of the climate risks to consider for your organisation are:

Climatic extremes

• Droughts and extreme heat
• Wildfires – forest, bush and grasslands
• Destructive storms (Hurricanes, Cyclones and Tornadoes)
• Rain storms and high strength straight-line winds
• Ice storms
• Coastal flooding and erosion

Country climate policy and regulations

• A nation’s climate policy will include incentives and penalties that influence business and community behaviour. An approach is a carbon emissions tax or emission trading scheme – both use the government’s imposed price on carbon emissions
• Support for the production and distribution of ‘future fuels’, including hydrogen, biogas, methane from renewable sources and liquid derivatives like ammonia

National (incl. Logistics) infrastructure

Industry

• Limits to emissions for power generation and industry
• Extreme heat causing reduced efficiency of electricity power transmission lines
• ‘Stranded assets’ – coal mines, coal loading terminals, oil refineries etc. may lose value due to zero or reduced demand for their products

Infrastructure maintenance

• Road asphalt can deteriorate faster due to extreme heat
• Extreme heat can buckle rail lines
• Seaports can be at risk from the effects of coastal flooding
• Repairing transport infrastructure could challenge government budget allocations

Transport

• Disruptions to critical infrastructure (sea and air ports, roads and rail)
• Road transport: fuel tax increase, road pricing, vehicle propulsion unit incentives and emissions penalties
• Discriminating regulations between road and air (the highest polluters) and rail and shipping (ocean and inland)

Facilities

• Owned, leased and third party buildings and facilities: in addition to location and the potential effects of climatic events, consider traffic congestion, road pricing, storage conditions for items and working hours of employees (due to climatic conditions)
• Building design and construction for extreme weather conditions

Supply Chain relationships

• Geographic shifts in resource availability
• Tensions in trading relationships (especially cross-border), which may increase supply chain vulnerability
• Suppliers that are less prepared for responding to climate change may require assistance from their customers
• Insurance costs against litigation for climate change damage
• Water shortages which may affect the supply of ‘invisible water’ – the amount of water required to provide a population’s daily needs of processed and manufactured goods
• Droughts, water shortages, increased growing season temperatures and reduced crop yields may provide constraints on food industry materials availability
• Some products will become more or less attractive for end users, changing the value proposition for an enterprise

Adaptation approach

Identifying where to focus your organisation’s supply chain adaptation initiatives is easy to say, but will require considerable effort. Step 1 is to understand the structure of your supply chains. However, the majority of organisations have yet to map their supply chains above or below Tier 1 customers and suppliers, so this will be an ongoing task.

Step 2 is to apply the supply chain map (even partly developed) to build a scenario based model that uses the analyses of facts and assumptions about your organisation’s value chains (demand and supply), business model and policies and regulations by governments.

Because uncertainties of unknown scope and intensity could occur at varied times in the future, your organisation’s response cannot be prescriptive. Instead, a scenario based model can illustrate how your organisation, its business model and business relationships are currently structured and the modifications that are required to enable a quick response to events and opportunities, as end user and supply markets change.

When evaluating Adaptation actions for your organisation, also recognise the transitional risks of climate change – the ways in which your business could be adversely affected by ongoing changes in regulations, investment patterns and consumer behaviour. Also, take account of potential geopolitical action by nations and changes in the pattern of global commerce; the increasing digitisation of business processes and access to finance in a period of increasing global debt.

In your organisation, how long does it take for any major change to the business model, markets or organisation to be proposed, discussed, accepted and implemented? Eleven years is not long for action in response to climate change!