Business Primer – Chapter 5: How To Do It: Assess and Manage Risks and Opportunities
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STEP 1 : IDENTIFY BUSINESS RISKS AND OPPORTUNITIES.
The initial appraisal conducted in phase 1 will provide the foundation businesses need to drill down into specific risks and opportunities. Risk — either upside or downside — is a function of the probability of an impact occurring and the magnitude of the consequence should it occur. Risk estimation techniques can be simple and qualitative (e.g., comparing the relative probability and magnitude of consequence for several potential impacts) or detailed, requiring quantitative information on climate projections, impacts research, and business consequences (e.g., estimating probabilistic outputs through Monte Carlo simulations).
// ASSESS THE RISKS and opportunities from a changing climate as they relate to the following five areas:39
- Site conditions, physical assets, and infrastructure
- Processes and workforce
- Raw materials, supply chains, and logistics
- Products, services, and markets
- Regulatory risks, changing standards, and business reputation
// WORK IN PARTNERSHIP (see Box 2).
// THINK BEYOND the factory gates to identify and manage risks and opportunities with your suppliers and customers.40
A KEY DECISION IS WHETHER TO RELY ON EXTERNAL AD VISORS OR BUILD INTERNAL CORPORATE CAPACITY.
ARE RESOURCES TIGHT? START BY ASSESSING A SPECIFIC COMPONENT OF YOUR OPERATIONS CRITICAL TO THE BOTTOM LINE OR A SPECIFIC GEOGRAPHIC SITE. THIS APPROACH PROVIDES THE ADVANTAGE OF “LEARNING-BY-DOING” AND ALLOWS BUSINESSES TO COMMIT THEIR RESOURCES MORE GRADUALLY.
IN PRACTICE // COCA-COLA
Water is the main ingredient in Coca-Cola drinks. The impacts of climate change on water availability, therefore, represent a key business risk for the company globally. Coca-Cola is taking steps to ensure a reliable supply of this valued input. All Coca- Cola manufacturing plants, including Canadian facilities, must complete a Source Water Vulnerability Assessment and then prepare and implement a Source Water Protection Plan. These assessments include assumptions about the impacts of future climate change alongside assumptions about infrastructure pressure, pricing, drought, competing use, increasing demand, regulatory limits, and social acceptance. Coca-Cola’s efforts to protect the supply of water and demonstrate good corporate citizenship have the benefit of safeguarding competitiveness.
Read the full Case Study
STEP 2 : PRIORITIZE RISKS AND OPPORTUNITIES TO MANAGE.
Businesses need to be strategic when choosing which climate change risks and opportunities get their limited attention and dollars.
// ESTABLISH a set of evaluation criteria to determine which risks and opportunities demand immediate action, which should simply be monitored, and which can be put aside. Criteria should include the following:43
- Financial risk: To what extent can this risk or opportunity threaten or enhance overall business value?
- Timing: When are climate change impacts expected to materialize? What lead time will the response require?
- Alignment with business values: What risks is the business willing to absorb? At what point do the risks become unacceptable?
- Proportionality: What is the magnitude of this risk relative to other risks actively managed by the business?
- Knowledge: Do you have enough information to act? The precise magnitude, timing, and location of climate change impacts will never be certain, but that uncertainty is not a valid reason to ignore climate change risk and defer action. Use the best available information and risk tools to treat uncertainty about climate change and its impacts as seriously as you treat other sources of business uncertainty.
// APPLY evaluation criteria to prioritize the risks and opportunities to manage.
// CHARACTERIZE both financial and non-financial consequences of those risks and opportunities.
YOUR BUSINESS RISK PROFILE IS A FUNCTION OF YOUR PRODUCT AND SERVICE MIX, COST STRUCTURES, INDUSTRY COMPETITIVE DYNAMICS, LOCATION OF OPERATIONS AND ASSETS, VULNERABILITY OF SUPPLY CHAIN, ABILITY TO IDENTIFY AND CAPTURE OPPORTUNITIES, AND BUSINESS – SPECIFIC RISK MANAGEMENT CAPABILITY KIERNAN OCTOBER 27, 2011; KOVAL OCTOBER 27, 2011
IN PRACTICE // RIO TINTO ALCAN
Rio Tinto Alcan — a Montréal-based global producer of bauxite, alumina, and aluminum — is developing a climate change sensitivity framework to assess the exposure of operations and associated infrastructure to climate change risks. An output of the framework is a matrix that highlights priority risks. Instead of using a top-down approach that attempts to foresee the future, Rio Tinto Alcan’s approach is bottom-up. It relies on the expert input of Rio Tinto staff, emphasizes learning from past events, and increases the company’s capacity to deal with the unexpected. The value of developing and applying this framework includes spotting opportunities in new geographies, identifying new risk dimensions, and enhancing competitiveness.
Read the full Case Study
STEP 3 : APPRAISE ADAPTATION OPTIONS.
Prioritizing the risks and opportunities to be managed will lead to strategies for dealing with them. Vulnerability can be reduced by transferring or spreading risk, reducing risk exposure, and avoiding risk. Other options are accepting the loss and exploiting new opportunities.44 In some cases it makes sense to postpone action to study the issue and narrow the uncertainties, all the while monitoring for shifts in risk profiles.45 The following process can be used to identify the most promising management options.46
// IDENTIFY a long list of risk management options.
- Consider options to manage specific climate-related risks and to build system resilience.
- Think beyond business boundaries, collaborating with infrastructure providers, suppliers, and others in the value chain.
// CONDUCT a qualitative assessment of each option.
- Favour “low-hanging fruit” that’s low cost or easy to address. Prefer those options with proven effectiveness to address the risk or opportunity, options that are flexible to course adjustments, options that benefit the business regardless of climate outcomes, options that yield co-benefits, and options that follow the precautionary principle. Avoid options that conflict with other business objectives.
- Consider whether the business has sufficient information, capacity, and lead time to implement the option.
// IDENTIFY a short list of preferred adaptation options.
// CONDUCT an assessment of each remaining option, using quantitative methods where possible.
- Depending on the information available, employ decision-support approaches like cost-benefit analysis, cost-effectiveness analysis, multi-criteria analysis, and scenario methods.
// CHOOSE the adaptation option(s) to implement.
IN PRACTICE // ENTERGY
In 2010, Entergy studied and quantified climate change risks in the U.S. Gulf Coast to identify cost-effective adaptive strategies. Completed in collaboration with Swiss Re and others, the study identified the following adaptive strategies, for which the benefits exceeded the costs with cost-benefit ratios of 0.7: updates to building codes, beach nourishment, and improved standards for offshore platforms.47 The results helped inform Entergy’s adaptation strategies and provided a foundation for community engagement, enabling Entergy to encourage community adaptation and to better respond to its customers’ needs.
Read the full Case Study
STEP 4 : IMPLEMENT AND MONITOR RESPONSE(S).
Prepare your business to adapt and thrive in a changing climate: the risk screening, risk assessment, and options appraisal in previous steps help deliver the actions that will position your business appropriately. The following steps will help to achieve results and learn from experience:
// PREPARE an implementation plan that includes roles and responsibilities, resource requirements, possible implementation challenges and corresponding ways to address them, links to other business activities, tasks and timelines, and a stakeholder engagement and communication strategy.48
// ESTABLISH a monitoring and evaluation framework that includes key performance indicators and success criteria.
// USE THE RESULTS of the monitoring strategy to flag needed course corrections, inform future planning decisions, and assess the adequacy of climate change risk governance.
IN PRACTICE // TOLKO
Tolko — a wood products manufacturer based in British Columbia — has adjusted its practices to strengthen the ecological resilience of the timber stands it manages. Tolko’s actions include increasing the diversity of the timber stand, considering local bioclimatic conditions when selecting tree species to plant, and avoiding soils that are considered to be vulnerable to climatic stresses. The company has also increased the proportion of Douglas firs planted in certain forest areas to increase resilience and improve carbon sequestration, despite the higher cost of planting this species. These measures will increase the capacity of a timber stand to cope with different possible climate futures, in line with the ecological concept of resilience.
Read the full Case Study
[39] The categories we present more or less align with the themes covered in the UK Climate Impacts Programme’s risk assessments (UK Climate Impacts Program 2010c). It also makes sense to use categories embedded in firms’ existing management systems.
[40] Facing the Elements: Building Business Resilience in a Changing Climate (Business Primer) 2012 includes advice on questions that small and mid-sized businesses should consider to assess their risks and opportunities.
[41] Canadian Electricity Association January 6, 2012.
[42] Intact and University of Waterloo ND
[43] UK Climate Impacts Program 2010c
[44] UK Climate Impacts Program 2010c
[45] UK Climate Impacts Program 2010c
[46] Brown et al. 2011; UK Climate Impacts Program 2010c
[47] Williams October 27, 2011
[48] UK Climate Impacts Program 2010c
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