In early May this year, the World Meteorological Organization released a report that—even in an era of scary climate and weather headlines—stood somewhat apart.
Amid an El Niño weather pattern, the WMO predicted that at least one of the next five years would exceed 2016 as the hottest on record. “There is a 98 percent likelihood that… the five-year period, as a whole,” they concluded, “will be the warmest on record.”
For businesses, that means growing costs—and growing risks—and not just for condo developers on Miami Beach and ski resort owners in Vermont but for every type of firm you can think of: For utility operators in California, grain-processing giants in the Midwest, refineries along the Gulf of Mexico and global cargo shippers and their customers awaiting delivery. For food distributors keeping products cool; for retail chains and grocery stores and mall operators running air-conditioning; for airlines flying through increasingly volatile storms; for steelmakers hit with rising power costs; for insurers, for banks, for virtually every commercial enterprise, more heat brings more expense—and more uncertainty.
Boards, of course, know it. Far from the presidential-year political tussles over ESG investing and the endless paperwork and wrangling over rules promulgated by the SEC, management teams and directors—across every industry—are deep in discussion about how to operate successfully amid the on-the-ground impact of a fast-changing, volatile global climate that will hit business in fast-changing, unpredictable ways. And have been for years.
“Climate change is one of the major uncertainties that companies face,” says Charles Conn, board chair of Patagonia and an economist by background. “In the old world, it wasn’t even on people’s minds. In the new world, it becomes one of those overlays on top of all the other uncertainties.”
Regulators around the world are already issuing unprecedented climate-related directives that are transforming markets, supply chains and other facets of business in what McKinsey calls “the greatest capital reallocation in a century.” This shift will require an estimated annual investment globally of more than $9.2 trillion in energy and land-use systems alone, just to keep up with worldwide pledges to achieve net-zero greenhouse-gas emissions, the consulting firm estimates.
But regulatory risk is just part of the shift, says Rob Bailey, a partner in insurance and asset management for Oliver Wyman consultants. “It’s not about woke capitalism but about sound risk management and what is the board’s responsibility at the end of the day. It’s pretty clear that the operational risks from climate-related disruptions are increasing.”
There are, of course, the macro and continental-scale risks, like growing power consumption amid increasing global need for air conditioning colliding with growing demand from manufacturers—and an aging grid, especially in the United States. But there are also thousands of smaller frictions that, taken together, can have a big impact on the day-to-day operations of a company.
A good example: the growing amount of heavy turbulence encountered by air travelers around the world. Since 1979, the amount of wind shear in the jet stream, the Wall Street Journal recently reported, has increased 15 percent. That’s resulting in plenty of additional costs not just to airlines, but business travelers as well.
“It’s a risk and an opportunity,” Bill Koefoed, a director of regional player Bank OZK and CFO of OneStream Software, says of climate change. “This impacts virtually every business in America to be thinking about the fundamentals now, not just of weather but of power and raw materials supplies.”
How can your board keep on top of all this change? Some strategies:
Conduct a scenario analysis.
Six years ago, AT&T became an early student of this reality, partnering with the federal government’s Argonne National Labs and its mega-computing power to build a three-decade-out climate-change analysis tool that helped forecast devastating impacts from inland and coastal flooding, and hurricanes, on the company’s infrastructure and businesses, down to individual U.S. neighborhoods—where their customers lived and worked.
Not many followed that path, but many others did begin to factor in potential costs and game out where increasing temperatures would hit their operations.
“Nature is no longer going to be a free ride,” says Paula DiPerna, a consultant and former president of the Chicago Climate Exchange, the world’s first carbon cap-and-trade system. “Resources are becoming too scarce, and they’re going to become way more expensive, directly or indirectly. The timeline is a five-year horizon, not 50 years.”
Because of this, advises Conn, “You need to undertake much more sophisticated analysis around any strategic decision. Move from an annual evaluation with little scenario planning to: What is the probability of a 100-year event occurring next year, now that 100-year water events are happening every three or four years? Your strategy needs to be dynamic and ongoing all the time.”
Directors should be conscious of the fact that “the impacts of climate are nonlinear,” Bailey says. “With each one degree of warming, you get more climate-related damage than with the previous one degree.”
For example, says Koefoed, “I do think climate change is going to impact the geopolitical landscape, so there’s the question about access to materials in other countries. If you’re a board member, it’s your job to do a broad strategic thought exercise and help your company think through that.”
Consider two types of danger.
The new weather extremes, whatever their end results, carry physical risks and transition risks. Typical of the former was how the huge winter storms in Texas in early 2021 shut down much of business in the state, affecting many industrial plants.
“You can argue about whether or not that was driven by climate change, but the reality was that certain chemicals used in building our cars were only sourced from a supplier in Texas,” recalls Reinhard Fischer, vice president of strategy for Volkswagen North America. “So we need to look at our supply chain and how sensitive it is to disruptions coming from nature, independent of whether it’s getting worse or not.”
Transitional risks go beyond weather threats to consider “to what extent the company is exposed to risks that originate from the change to a low-carbon future,” says Donato Calace, a senior vice president of Datamaran, a platform that helps companies monitor external risk factors. “They may not be exposed to physical risks per se from coastal development, for instance, but the countries they’re operating in may have an aggressive agenda, such as on carbon taxes, that will have a material impact on their business.”
It’s crucial for boards to also follow the implications of climate shifts beyond their own operations to extend up and down their supply chains, where impacts could be multiple.
And given the potential magnitude of climatic effects across the economy, no vertical is immune to concern. For instance, notes Koefoed, “Banks are making loans to businesses, so as we think about the bank’s loan portfolio and about the impact of climate on the businesses we’re loaning money to, every bank board should have those discussions.”
Create a nerve center.
Add climate-science competencies to the board’s deliberations in any number of ways. “It’s not enough,” DiPerna says, “to just roll up the issue to the audit committee.”
Establishing a climate committee is one idea, but not a climate board seat. “Having one person who is the expert creates the risk of an unhelpful dynamic on the board because that person’s views may carry more weight,” Bailey says. “You want a constructive challenge on the board.”
In any event, says Kristen Sullivan, global sustainability and climate-services leader for Deloitte consultants, “From a strategic perspective, the CEO needs to have a clear role in understanding climate risk.”
Seize new opportunities.
This goes way beyond the notion of trading carbon credits to offset emissions, or selling them, for that matter. “There are competitive advantages in efficiency, and opportunities for reputation enhancement, in being able to market products that are lined up not only with the science of climate change but with the opportunities ahead,” DiPerna says.
Jake Peters, for instance, founded a new manufacturer of aftermarket pickup-truck accessories after surveying the competition and figuring that an environmentally related pitch could be part of the market proposition for his Decked brand. “Customers like the fact that the product is recyclable material,” says the chairman and founder of the fast-growing manufacturer. “We feel better about it, and customers appreciate the fact that our products are made of that.”
Suchit Punnose, chairman of Eco Hotels UK, has made climate-change mitigation part of the fundamental appeal of the hotels and other buildings constructed by his company, Modulex, which include a new Marriott that is the tallest modular hotel in New York. The company established a private blockchain capability to catalog data on all input materials until the unit is handed over to the landowner.
“What we’re really excited about as a product feature is that all of our buildings will be carbon-certified,” says Punnose. “Carbon net zero [construction] is something that can help you upsell.”
Mini chose climate technology as the focus for a new “cohort” of startups that it annually enrolls in its Urban-X accelerator program. The BMW-owned small-car brand gets peeks at interesting technologies, such as Carbon Blue, which is developing “marine calcium looping technology” that removes carbon dioxide from oceans and returns calcium, and Dryad, which provides early forest-fire detection and health monitoring. “With us targeting to become an all-electric brand by 2030, it’s important for us to have a perspective on things like climate change,” says Mike Peyton, a Mini vice president. “Or how to make [the materials in] our vehicles vegan, and how to have no use of chrome going forward” because of environmental concerns.
As head of the board of an outdoor-gear brand with a legacy of environmentalism, Conn has helped oversee a dramatic recent shift by Patagonia because of the concerns of founder Yvon Chouinard over climate change. Patagonia recently diversified into the food business, with moves such as acquiring Moonshot, a startup that produces crackers made with ingredients raised in carbon-sequestering fashion through “regenerative” agricultural practices.
“Apparel-making is responsible for about 10 percent of global emissions, which is pretty important,” Conn says. “But the biggest business in the world is food, and about two-thirds of the world’s surface is used to grow food or the animals we eat or food for the animals we eat.”
Rising oceans, epic floods, biblical-scale tornadoes and the like haven’t become exactly passe, but they’re constantly being joined by new environmental concerns. Biodiversity is the latest one, including worries that continued human destruction of natural habitats has eliminated vast percentages of songbirds, bees and other creatures.
“It’s not just about carbon dioxide but about how we preserve water and land and avoid deforestation in biodiverse ecosystems,” says Leticia Goncalves, president of global foods for Archer Daniels Midland. “Emissions are just table stakes. There’s everything else that goes with it. And you can create new business models around biodiversity.”
