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This article was originally published by The Lawyer’s Daily, part of LexisNexis Canada Inc.
Climate change is an issue that is increasingly on the radar of businesses, consumers and governmental agencies. The prevalence of climate change in business agendas is largely a result of the potential substantial risk that it presents, making risk mitigation and adaption strategies a priority.
Canada’s Changing Climate Report confirms that Canada’s climate has warmed in response to global emissions of carbon dioxide from human activity. The effects of widespread warming are projected to intensify in the near future.
Furthermore, a recent survey by the Climate Disclosure Project predicted that risks associated with climate change will cost public companies approximately US$1trillion over the next five years. Indeed, approximately 53 per cent of the responding companies to that survey identified both physical and transition climate-related risks that could potentially have financial or strategic impacts on their businesses.
Rise in temperatures
The Intergovernmental Panel on Climate Change (IPCC), the United Nations body for assessing the science related to climate change, has forecasted a rise in temperatures with high confidence, and it has predicted that this temperature change will not be regionally uniform.
The IPCC has made other predictions with respect to changes in the cryosphere, the water cycle and the carbon cycle. To make matters worse, the IPCC has stated that a “large fraction of climate change is largely irreversible on human time scales.” However, it is important to be mindful of the fact that climate change forecasts are not definitive. The reasoning for this is twofold: 1) forecasts are dependent on scenarios of future anthropogenic and natural forces that are uncertain and 2) there is still an incomplete understanding of the medium-term and long-term effects of climate change and current models of the climate system are imprecise.
As such, the forecasts do not necessarily mean bad news, and there are risk mitigation strategies that businesses should adopt to deal with, or even get ahead of, potentially disastrous consequences.
Impacts in sectors
The impacts of climate change will vary by sector. In industry, for example, activity is sensitive to changes in weather and to extreme events, with notable differences in the type and the extent of impacts on production, operations and revenue across and within sectors. Furthermore, responses to climate change in industry practices have been predominantly reactive to variation in the weather or extreme events, as opposed to proactive measures taken in anticipation of future climate change.
Adapting to risks
There are ways that businesses can adapt to climate change risks. Physical risks, for instance, are those that are related to damage inflicted on property or other assets by unpredictable weather patterns and natural disasters. This can impact a company’s performance. While physical risks are nearly impossible to control, companies can take pre-emptive steps.
For example, forecasting various possible scenarios can be helpful as it can highlight the vulnerabilities of businesses in the event of changing weather patterns and natural disaster, i.e.: assessing potential future interruptions to their business operations based on access to water for manufacturing processes and change in temperatures that can impact operations.
Once that is done, risk mitigating processes and technical standards can be put in place for short-term risk management and changes to the supply chain can be implemented to reduce vulnerability and help with long-term risk management.
Regulatory risk, which refers to the government’s response to climate change, can also be alleviated pre-emptively.
Businesses can use a three-part strategy to manage regulatory risk. Firstly, they can participate in conversations that shape future regulatory decisions and understand the various policy options in order to inform their internal processes. Secondly, businesses can develop an internal strategy on climate change to position themselves to react in the face of regulatory and policy changes. Finally, businesses can work with external stakeholders, such as regulators and industry groups, to get their perspectives and have their own voices heard in the policy and regulatory implementation processes.
Climate change forecasts and the strategies used to address the forecast will vary across different businesses, depending on geography, target markets and management. One constant, however, is that the businesses that ignore climate-related risks, such as the ones mentioned above, will likely see negative mid-to-long-term consequences. Nevertheless, the businesses that acknowledge the risks, put in place the proper protocols and monitor climate change forecasts are in a better position to manage and mitigate the challenges posed by climate change.