North American companies are starting to consider the need to adapt to climate change
After Hurricane Sandy hit New York, New Jersey and the eastern US coast in 2012, local businesses from giant utilities to the nascent New York bike share programme felt the pain, with New Jersey alone reporting $8.3bn in business losses. Indelible images of the storm – such as lower Manhattan’s business district flooded and darkened – were a pointed reminder to all on the continent of human vulnerability to extreme weather. The storm’s aftermath included a sudden increased awareness among American companies of the need to tackle resilience and adaptation to climate change.
Extreme, “billion-dollar” weather events in the US have been increasing at a rate of 5-15% a year over the past three decades. According to Munich Re, 92% of all insured losses in 2012 were attributed to North America. Sandy played a forceful role, yet more than 80% of US farmland also experienced drought in 2012, with losses amounting to more than $30bn. In early 2014, the California drought is again registering record losses for agriculture.
In 2013, two major Canadian cities, Toronto and Calgary, experienced major flooding. Add to that ice storms in December, and the total Canadian insurance losses in 2013 were C$3.2bn (£1.7bn), an industry high.
Local businesses may bear the brunt of a single extreme weather event, with real estate, natural resource industries, electric utilities, and insurance companies as the natural victims of the ravages of climactic disturbance. While it is common for big corporations to have targets for energy efficiency and greenhouse gas reductions, now a few in these key areas are also beginning to factor resilience and adaptation into business decisions, with the insurance industry leading.
“The property and casualty insurance sector is really the only industry driving [climate] adaptation in a meaningful way,”says Blair Feltmate, chair of the Climate Change Adaptation Project Canada, based at the University of Waterloo, south-west of Toronto. Feltmate and his team have worked with major Canadian insurance companies including Intact and the Co-Operators. Feltmate says the leading companies in the sector are not only improving their own businesses, but are also pushing their customers to assess their climate risks.
“All companies need to do systematic and collaborative scenario planning and assess key [climate] vulnerabilities,” he adds.
Critical first step
Major US insurer Hartford Group took some critical first steps by giving its enterprise risk management group the task of examining reports by the Intergovernmental Panel on Climate Change, peer review scientific articles, and partner with universities, with the aim of building a better picture of likely changes in climate and weather.
Hartford Group has since used its database to ensure that the balance of risk from the different regions is kept level, so that its underwriters are aware of the areas more susceptible to extremes. Intact, the largest Canadian property and casualty insurer, recently commissioned the University of Waterloo to conduct research on climate adaptation in Canada. This resulted in a detailed study of climate-related risks and subsequently proposed changes in the services offered by Intact, including new products.
“We are changing [what we offer] and creating incentives to help customers protect their homes better,” says Charles Brindamour, chief executive of Intact. “Customers are aware of the perils they face and want products that address them.” He notes that Intact now provides more emergency relief, and more information and incentives for customers who implement climate adaptation measures.
Insurance companies more closely examining weather risk is important for two reasons. It provides an incentive for companies and people to make their businesses more resilient and less subject to higher insurance rates. It also drives the research and effort drastically needed to assess climate change risks accurately. “The industry as a whole is focusing more heavily on factors such as proper flood mapping,” says Sarah Kennedy, corporate responsibility consultant at RSA, another large property and casualty insurer.
Fixed assets a first step
Hurricanes Katrina and Rita in 2005 cost the electrical utility Entergy $2bn. Eventually, the losses and lost revenue from the destruction of its customer base forced Entergy New Orleans to file for bankruptcy. After Katrina and Rita, the rest of Entergy became a leader in adaptation.
“We had always focused on business continuity, but have since begun taking a wider approach, strengthening our customers and communities’ resilience as well as our own,” says Jeff Williams, senior manager for climate change consulting for Entergy. The company takes a three-pronged approach to making its business more resilient: using technology – for example, stronger electric poles and improved data gathering – to make its infrastructure as durable as possible; creating awareness and being transparent through public reporting; and partnering with NGOs such as America’s Wetland Foundation and Restore America’s Estuaries, to improve the natural resilience of the land surrounding its physical assets.
By making the communities it serves as resilient as possible, the utility protects its customer and revenue base. “The strategic value of this approach will help Entergy’s business in the long run,” says Williams.
Forward-looking property managers are also starting to adapt to climate change. Leading North American real estate manager Bentall Kennedy took lessons learned from Hurricane Sandy and applied them in Calgary.
“It is about taking climate change adaptation and putting it in property management terms,” says Nada Sutic, director of sustainability at Bentall Kennedy. “Ensuring that procedures are in place so that in the event of a flood, simple measures are taken such as raising elevators above ground level and sandbagging underground parking can be major cost-saving tactics.”
Bentall also commissioned Feltmate and the University of Waterloo to identify opportunities to manage climate change-related risks.
“Specific real estate studies on adaptation needs don’t exist,” Sutic says. Systematically assessing real estate portfolio risk using updated flood maps or other risk identification tools will be a next step for industry leaders. After Hurricane Sandy the flood maps in New York were updated for the first time in 20 years with the number of buildings situated in flood areas increasing from 35,000 to 67,000.
Resource risks and losses growing
Twelve of the 20 largest forest fires in California’s recorded history have occurred since 2000. Natural resource industries face climate change risks that are very complex and interact with existing risks. Washington state-based Weyerhaeuser, one of the world’s largest timber companies, is dedicating resources to increase its understanding of climate risk. Forests yields may not drastically change, but warmer climates mean outbreaks of pests in new areas, while changes in precipitation can lead to landslides and fires.
Weyerhaeuser uses in-house scientists and laser imaging technology to monitor its timberlands and assess the risk of insect infestation, such as Swiss needle cast disease, a new threat in northern latitudes from climate warming. It also collaborates as much as possible to keep up on emerging threats such as Douglas fir root rot.
For each good example, however, there are many others that are not up to par. Northern mining and oil production companies must begin to adapt operations to changing levels of permafrost; the agriculture sector must plan further for resilience to water scarcity and drought. And dialogue with government on resilience is still scarce.
In the fourth quarter of 2011, technology giant HP attributed half of its 7% revenue decline to a shortage of hard disks due to flooding in Thailand.
“Climate change is almost certainly the greatest risk in the supply chain,” says Steven Price, senior director of conservation science and practice at WWF Canada. Price works with companies on adaptation strategies. Companies with extensive supply chains that rely on commodity inputs and manufacturing in multiple, far away locations are accustomed to assessing supply chain risks. Now climate change is acting as a “risk multiplier”, increasing traditional risks to largely unknown degrees.
“Why are we committed to focusing on climate resilience and adaptation? First, many of our employees and consumers have already begun to feel the impact of climate change,” says Levi Strauss & Co in a recent strategy document.
Green Mountain Coffee Roasters, the world’s largest buyer of fair trade coffee, and owner of brands such as Keurig and Bigelow Teas, also explicitly acknowledges the importance of climate change resilience in own operations and supply chain. It is working to battle warmer climate diseases its coffee farmers face, such as “La Roya”, the coffee tree fungus, with loans (through Root Capital) to replace dead trees and diversify small farmers’ plantations to provide economic and food security. The company describes the risks and impacts of climate change as a “cross-cutting theme” in many of its projects.
The vast majority of companies, however, are not yet factoring the effects of a changing climate into traditional supply chain risks. The research and management needed to address the risks and opportunities posed by climate change are in their infancy.
“Even the most progressive companies are still in the nascent stages of trying to determine their climate change risks. Most companies are completely unaware,” says Feltmate. “What we see is essentially management by disaster, where after a disaster, and only with regards to the specifics of the disaster, people and companies take action.”
The frequency and severity of recent weather events are leading companies to place adaptation higher on the agenda. Some companies are starting to see the opportunity in being “first movers” on this issue.
“I would like to say we are proactive, but it has been difficult,” says Intact chief executive Charles Brindamour. “Now the insurance industry and other industries are doing more and getting better at addressing the risks. There is already a need, and we think an opportunity.”
Francisca Quinn is founder and president, and Tony Pringle a consultant, at Quinn & Partners. Quinn & Partners is a Toronto-based sustainability strategy and integration advisory firm.climate change energy future natural resources North America briefing