The changing profile of corporate climate risk

Scientists have called for a near-term reduction in global emissions of carbon dioxide (CO2) of more than 70% to stabilize the concentration of CO2 in the atmosphere. Meanwhile global CO2 emissions, as well as emissions of the other so-called greenhouse gases (GHGs), continue to increase. While a political consensus exists for the view that exceeding 2°C of global temperature change would constitute ‘dangerous anthropogenic interference with the climate system’ (the avoidance of which global governments are committed to through the United Nations Framework Convention on Climate Change), that amount of warming is already almost inevitable. More importantly, there is no global action plan in place to prevent much more dramatic temperature rises in coming decades.

Even as climate science has solidified, companies have been hearing for years that they don’t need to know much about climate change science, they just need to recognize that ‘the climate policy train is leaving the station, and you want to be on it’. This ‘policy paradigm’ of climate risk assumes that policy and regulation are the primary contributors to corporate climate risk, rather than climate change itself, and encourages policy-oriented risk responses. Correspondingly, the primary focus of corporate risk management activities has been to be at the policy table (rather than ‘on the menu’), to measure and commit to reducing corporate carbon footprints, to anticipate the timing and magnitude of a future price on carbon, and to use carbon offsets to voluntarily reduce corporate or product-based emissions. Hundreds of corporate footprint reduction commitments and a slew of ‘carbon-neutral’ products and services have sprung up as a result.

Some 25 years after initial calls for broad-based GHG emissions reductions, agreement on climate change policy to accomplish these reductions has proven an almost impossible nut to crack through domestic legislation or international negotiations. It’s not for a want of trying; numerous policies intended to help reduce GHG emissions, and reduce or adapt to climate change are in place or being developed around the world. The problem is that these measures are unlikely to do more than scratch the surface of what scientists have said is necessary in order to materially reduce climate risk.

With the failure of national climate change legislation in the US, and the anticipated failure of international efforts to extend a meaningful version of the Kyoto Protocol, many companies are asking themselves: Climate risk? What climate risk? Companies should question, however, whether the ‘policy paradigm’ that underlies this conclusion, and that has guided corporate thinking for more than a decade, is actually the right risk management paradigm.

For example, does the growing disconnect between societal climate change risk and climate change policy have risk implications for business? How material to business is climate change itself, including all of the associated supply chain and brand risks? Is it reasonable to assume that if climate change makes itself increasingly felt it will become politically harder and harder to ignore, and that the risk of sudden and draconian policy risk will escalate? A gradual glide path to lower GHG emissions and toward a higher price on GHG emissions – long an objective of corporate efforts to influence climate policy – could be rendered moot if the public and policy-makers conclude that we have run out of time for gradual measures.