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Business Primer – Chapter 2: Business Risks and Opportunities

Businesses already manage a range of risks and opportunities, some relating to extreme and unpredictable weather. So how is adapting to the risks and opportunities of a changing climate any different?

In some ways it isn’t. For our resource industries that work on the “frontier,” planning for and adjusting to prevailing weather and climate is the normal way of doing business. Eastern offshore oil and gas businesses build platforms that withstand Atlantic hurricanes, and western oil and gas producers successfully operate under a wide range of climate conditions. Agribusinesses cope with floods and droughts, and optimize their production in response to changing weather forecasts. Forestry and tourism businesses are accustomed to dealing with environmental change, including such natural disturbances as wildfires.

Yet coping in the short term by relying on past experience differs from adapting to new climate conditions for the long term (see Box 1).

Box 1

The following examples show how different industry sectors become exposed.19 Some risks are internal, others arise across supply chains, and still others relate to broader aspects of society, such as markets, stakeholder expectations, and the regulatory environment. In a global economy where lean inventories, long supply chains, and just-in-time delivery approaches prevail, the potential for far-reaching and cascading impacts is not out of the question.

OIL AND GAS // Rising temperatures and shifting water regimes pose operational risks, including a shortened winter drilling season, damage to gas pipelines from soil movements caused by flooding or overflowing rivers, and reduced quantity and quality of inputs (water) critical to exploration, production, and refining. Storms in the North Sea and hurricanes in the Gulf of Mexico already cause downtime in operations and related revenue losses. With sea and storm conditions expected to change as oceans take up heat, financial risks include higher insurance premiums, outage costs, lost revenues, and reconstruction costs.

MINING // Reliance on long-lived and capital-intensive assets in sometimes remote locations, extensive transportation networks, and tight supply chains make mining activities vulnerable to the physical impacts of climate change. Operational risks include a shortened winter road season affecting the ability to move goods to and from remote mines, shifts in seasonal water flows compromising water-intensive mining and milling activities, more frequent and intense extreme weather and other disturbances (e.g., wildfires) leading to disruption of mining operations and supply chains. Safety, legal liability, and reputational issues could arise from environmental releases of tailings stored in degrading permafrost. Opportunities could arise as new transportation routes in a warming Arctic give a competitive edge to Northern mines.

AGRIBUSINESS // Rising temperatures, moisture deficits and excesses, shifts in the prevalence of pests, diseases, and the entrance of competing plants all affect crop yields and quality, presenting both operational and financial risks to growers. In some locations, warmer conditions could enhance crop productivity and create opportunities to cultivate new crops. Unplanned spending to repair damage caused by extreme weather events and other disturbances like wildfires presents another source of financial risk posed by a changing climate. Volatility in crop yields raises the prospect of increased input costs for food and beverage manufacturers and for certain biomass energy producers.

RETAIL AND DISTRIBUTION // Increasing numbers and intensities of extreme weather events create operational risks like damage to infrastructure assets and inventories. Because retailers rely on stable transport and logistics systems, product distribution is also susceptible to transport disruptions or delays that could increase in a changing climate. Some retailers could face financial risks resulting from a rise in product costs from climate-related shifts in the supply and price of raw materials (e.g., water) and commodities (e.g., cotton, fuel). Weather influences consumer preferences: in a changing climate this will translate into both seasonal opportunities and risks, depending on the product concerned. (For example, U.K. research shows that people switch from beer to cider at 18°C.)20

UTILITIES — HYDROELECTRICITY // A range of operational risks from average changes in temperature and precipitation and increasing climate variability are apparent. Glacier melting and shifts in runoff patterns affect generating capacities, and higher seasonal temperatures can reduce demand for winter heating and increase demand for summer cooling. Challenges to asset and infrastructure design, operation, and maintenance include adjusting hydroelectric generation plans to deal with increased flooding risk and longer summer low-flow periods and protecting transmission and distribution lines exposed to extreme winds, wildfires, storms, icing, and storm-related landslides and rock falls. Legal liability could accrue from third-party damage from infrastructure and asset failure. Strategic risks can result from the need to balance competing demands for water with other sectors.

TECHNOLOGY, MEDIA, AND COMMUNICATIONS // A rise in numbers and intensity of extreme weather events presents operational risks to telecommunications businesses that rely on the performance of expansive physical networks of telecommunications facilities and infrastructure, along with local electric transmission grids. Infrastructure and asset damages resulting in service interruptions and dissatisfied customers pose reputational challenges. Worker safety could also be compromised. Network failures and disruptions present financial risks: a rise in costs related to network maintenance and repair, insurance, and emergency response. Businesses that supply new IT applications that enhance business resilience stand to benefit.

FINANCIAL SERVICES // A changing climate could erode the creditworthiness of climate-vulnerable clients and affect the long-term returns of investment portfolios specialized in one or a few sectors in locations highly exposed to the physical impacts of climate change. Operational risks from disruptions to business continuity are possible due to more frequent and severe weather events. Canadian asset managers will face financial risk from physical impacts overseas. Opportunities for the financial services sector include project financing for infrastructure upgrades and new builds to withstand impacts. Banks and insurers are uniquely positioned to promote climate change risk management and adaptation across the economy via lending requirements and by aligning insurance premiums to reflect changing climate risk.

Businesses in Canada are becoming aware of the risks and opportunities posed by a changing climate but few are taking action in anticipation of future impacts.21 Several factors inhibit getting started, including (1) confusion about the differences between GHG emissions mitigation, adapting to GHG emissions mitigation policy, and adapting to future climate; (2) a poor understanding of the benefits of acting now on risks from future impacts; (3) inattention to longer-term and gradual changes in climate conditions; and (4) the perception that a reactive approach is sufficient.22 Information in this report can help overcome these hurdles.

[16] British Standards Institution 2011
[17] British Standards Institution 2011
[18] Smith et al 2011
[19] The examples cited are primarily derived from Canadian responses to the Carbon Disclosure Project (Carbon Disclosure Project 2010) and from our case study research.
[20] British Standards Institution 2011
[21] Deloitte 2011; Wellstead 2011
[22] See chapters 2 and 4 of NRT’s Main report for a complete discussion on barriers to business adaptation in Canada.