17 Aug 2012

Manage climate risks with this framework – whether you’re a believer or not

Written by Jim Pierobon

Whether one believes in the threats of a changing climate, or not, businesses are sticking their heads in the sand if they don’t at least acknowledge some degree of risk and manage it accordingly.

I find it almost impossible to believe how corporate officers, policymakers, insurers, many investors and coastal property owners – to name a few – can choose to ignore conclusions of both the 2007 landmark retired Generals’ report and the International Panel on Climate Change’s Fourth Assessment Report about how climate poses significant national security, economic, environmental and societal risks.

Here’s a prudent approach I put a lot of stock in. It’s courtesy of Jay Gulledge, Ph.D, Director, Science and Impacts, at the Center for Climate and Energy Solutions, in Arlington, VA (photo). He used to be with the Pew Center on Global Climate Change, which renamed itself in 2011 after Congress failed to pass cap and trade legislation.

Jay Gulledge, Ph.D, Director, Science and Impacts, Center for Climate and Energy Solutions CREDIT: The Energy Fix

In their report, Degrees of Risk, Gulledge and colleagues heed the U.S. National Academy of Sciences 2011 Report on the world’s climate choices. They go beyond it with ten recommendations (see chart, below, in the right column) on what to do now to minimize future costs. Corporations might be prudent to do something very similar on their own.

The choice is not whether to act or ignore global warming. Now it’s about limiting the magnitude and resulting costs of climate change and preparing for its impacts on humans.

How do business leaders and policy makers go forward: it’s all about managing risks with responses geared to increasing temperatures.

Ten recommendations from Degrees of Risk, by the Center for Climate and Energy Solutions.

Gulledge provided insights during a recent presentation at the Johns Hopkins University Energy Policy Program in Washington, DC.

To boil it down, here is one way to remember the prudent approach that Gulledge recommends (from the left column):

A. Aim to comply with the ambitious and widely-adopted target of a global temperature increase of 2 degrees Celsius;

B. Build and budget for a second-best outcome, or policy shortfall, resulting in a rise of 3-5 degrees Celsius; and

C. Craft a crash contingency plan for an outright failure of policies and markets with temperatures rising more than 5 degrees Celsius.

One would be naive not to acknowledging that climate activists such as Greenpeace, the Sierra Club and Bill McKibben and the 350.org group serve roles in underscoring possible bad outcomes. But Gulledge and I agree they are marginalizing the impact they might have on policymakers.  The same could be said for climate deniers and skeptics, including the Koch brothers, the Heartland Institute and U.S. Sen. James Inofe, R-OK.

So why not focus on the intrinsic uncertainty, not the best-, or worst-case scenario?

Prudency dictates businesses have some type of plan in place, in much the way they are choosing to manage financial and market risks and hedge against possibly catastrophic weather and other outcomes they cannot control.

Example to Consider: Managing the Risks of an Offshore Oil Well Blowout

If one were to apply such an approach to managing the risks of a catastrophic blowout of an well drilling for petroleum in the U.S. Gulf of Mexico, it’s understandable why oil companies have elected not to focus the resources that they deserve.

Why? Because the maximum exposure BP, for example, faced under any scenario from the blowout of its Deepwater Horizon rig in 2010 was a U.S. federal liability cap of $75 million per blowout. That might seem like a lot of money until one considers BP made significantly more than that — about $86 million — a day company-wide from 2007 to 2009, according to its financial results for those years.

So perhaps BP’s rationale¬† is to chalk up the potential $75 million as a cost of doing business and save the trouble of investing more time and money in managing those risks proactively. (That cap has yet to be changed.)

BP might not have taken into account the possibility of a large government-imposed escrow of $20 billion BP was required — and agreed — to pay for damages.

Go here for a 1 min., 20 sec. video of Gulledge (photo) addressing the benefits of managing the risks of climate change.

What companies do you know that have a robust climate risk mitigation strategy in place?

Please do chime in.

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