The media and interested parties are focused on the COP21 climate change conference taking place in Paris. Climate change is a lot in the news and there are many discussions around reducing greenhouse gas emissions, especially carbon emissions from fossil fuels. Despite this, it is easy for some people to be cynical and dismiss the issue of climate change as just another hot button issue that is dear to environmentalists and idealists. But climate change has direct impacts on business operations and the way companies track and measure operational risks. Executives and board members need to be aware of operational risks affecting their businesses that are directly linked to climate change.
Operational Risks Also, Not Just Reputational Risks
Most companies that consider climate change to be material aim to demonstrate to stakeholders, and society, that they are good corporate citizens by addressing climate change through such initiatives as:
- Reducing direct carbon emissions from facilities, assets and operations.
- Reducing indirect carbon emissions by purchasing less energy from fossil sources and more renewables.
- Tracking carbon emissions from the supply chain, and taking steps to reduce emissions throughout the lifecycle of products.
- Making financial contributions to organizations or initiatives that raise awareness to climate change and/or propose solutions.
- Investing time and resources to raise awareness about climate change in their communities.
All of the above are effective steps to improve environmental performance and tackle climate change. In addition to a more sustainable planet in which to operate, companies also reap an additional reward: mitigating reputational risks. A risk can also give rise to an opportunity. By showing stakeholders that it is addressing climate change, a company can enhance its reputation, and thus attract clients, partners and investors for whom climate change is an important issue.
But climate change does not just affect the reputation of a company. There are a number of examples where a changing climate, and its effects on nature, are also affecting company operations. Climate change is also creating operational risks, in addition to reputational risks. There are plenty of such operational risks that we can talk about, but we will focus on only a few examples, because our main goal is to demonstrate the link between climate change and operational risks.
Impacts of Climate Change on Supply Chain Resilience
Companies that rely on global supply chains are directly impacted by climate change. Extreme weather events may not be a problem in, for example, Toledo, Ohio where a number of automotive parts manufacturers maintain production facilities. But these companies may depend on parts from suppliers located in other regions of the world that are at the forefront of the devastation caused by climate change. A flash flood in Asia, or an unusually severe storm in the same area of the world, leading to power outages over many days, can shut down production for companies located in the area, and that supply parts to the company in Toledo. It may also lead to delays or price increases of materials, which impact the profitability of manufactured goods. These scenarios may apply to any manufacturer that relies on overseas suppliers to keep production going, and fulfill client deliverables.
As a result of the impacts of climate change on the supply chain, companies need to assess:
- Which suppliers are in areas that are the most subject to extreme weather phenomena brought by climate change.
- How to mitigate supply chain risks brought by climate change. For example, companies may:
- Diversify the supply chain or change suppliers by taking into account the potential impacts of climate change on areas where new suppliers are located.
- Modify lead times for deliverables from suppliers, or modify the amount of inventory on-hand.
Impacts of Climate Change on Production and Manufacturing
If the theme of the previous section was “too much water”, because of floods and storms, the theme of this section is “not enough water”. Since climate change affects the hydrological cycle, not only is there more precipitation than usual in some parts of the world, but other areas may experience unexpected or longer periods of drought, increasing the vulnerability of water scarce regions. Many industries depend on water access, including freshwater. This is not a situation where lack of access to water becomes an inconvenience. Rather, it has the potential to shut down or delay operations, thus leading to loss of revenue and market share. Here are some examples:
- The energy industry needs water for electricity generation. This is part of the “water-energy nexus”. Almost half of all water withdrawn in the U.S. is used to keep power plants cool enough to function safely and efficiently. Water is also needed for hydropower, solar power, geothermal energy and bioenergy.
- The oil and gas industry needs water for hydraulic fracturing (“fracking”), enhanced oil recovery and other fossil fuel production processes. This interactive map shows water availability across shale gas and tight oil resources.
- The mining and metals industry relies heavily on water. For example, finding large quantities of clean water, up to 500 gallons (1,893 liters) per second, is a challenge for mining copper, the NRDC says. In addition, 88% of coal mines are located in 29 countries ranked as “high to extremely high” for water stress risk by the WRI.
- Agriculture’s dependence on water directly impacts the food and beverage industry.
- Facilities with servers, networking gear and other IT equipment require plenty of water to stay cool. California, which is affected by a severe drought, is home to an estimated 800 such facilities, according to GreenBiz.
- Computer CPU manufacturers require a large amount of water. More than 70 pounds (31.75 kg) of water have been used to make just one chip weighing less than an ounce (28 grams), according to the NRDC.
As a result of the impacts of climate change on water access and availability, companies need to assess whether their manufacturing or operating facilities are located in areas of high water scarcity. They must then determine how to mitigate operational risks due to water availability issues brought by climate change.
Include Climate Change Impacts in Operational Risk Management
Now that we have seen some of the tangible effects of climate change on business operations, what is the main lesson learned, besides the need to seriously tackle climate change? The main takeaway is that the effects of climate change must be tracked as part of operational risks managed at the enterprise level. There are many types of risk (financial, legal, human resources, operational, IT, reputational, etc.). Most leading and responsible companies are good at tracking their reaction to climate change as a reputational risk they need to mitigate. They recognize that if they fail to act on climate change, their corporate reputation may suffer. But they also must identify operational risks brought by the impacts of climate change, especially when shareholders and stakeholders are increasingly asking about the effects of climate change on business operations, revenue and profitability. As part of any process, be sure to be aware of operational risks due to climate change. This enables greater resilience through business efficiency and supply chain continuity.
