Executive Summary – Facing the Elements

0.1 FACING THE ELEMENTS

The capacity of and actions by businesses to adapt to the impacts of changing climate conditions — both average and extreme — will shape Canada’s future economic prosperity.

Businesses of all sizes, in all regions, and sectors will face both direct and indirect impacts to their business from climate change. And, since we live in a global economy characterized by lean inventories, long supply chains, and just-in-time delivery, impacts on one business have cascading consequences on others. Proactive planning for climate change can limit downside risks and help take advantage of commercial opportunities posed by the irreversible effects of greenhouse gases (GHGs) already in the atmosphere.

Yet relatively few companies appear to be taking a structured and explicit approach to incorporating climate change risk management and adaptation into regular business activities. Canadian businesses are already thinking about and acting on GHG emissions mitigation and carbon management, but they allocate far less attention to adaptation.

Facing the Elements: Building Business Resilience in a Changing Climate (Advisory Report) — the fifth report in the Climate Prosperity series by the National Round Table on the Environment and the Economy (NRT) — emphasizes the important, yet largely unexplored, role of Canadian business in defining our ability to prosper in a warming world. Through a combination of in-house and commissioned research and stakeholder perspectives captured in NRT events, this report addresses two questions: What can and should Canadian businesses do to prepare and take action to manage the risks and opportunities of a changing climate? How can and should governments support business capacity and action, alone and in collaboration with others?

From a public policy perspective, business engagement on adaptation matters for three reasons. First, a lack of preparedness for future climate can hurt the bottom line, affecting investors, customers, employees, and, ultimately, our economy and society. Second, corporations supplying essential services to Canadian households and businesses like electrical power, Internet and cellular services, and transportation should plan, build, and operate infrastructure with the future climate in mind. Third, a changing climate presents opportunities as well as risks to Canadian businesses and industry sectors. Countries like the U.K. are actively exploring and exploiting opportunities of adaptation, and so should Canada.

Throughout the project, our approach was to learn from the leaders, understand drivers of and barriers to business adaptation, and emphasize practical tactics and strategies to support and incent the integration of climate change risk and adaptation into economic decisions among Canada’s private sector.

0.2 STATE OF PLAY

Risks and opportunities from the impacts of climate change are increasingly on the radar of large Canadian businesses. In particular, businesses are aware of the potential for more frequent and severe weather events to damage existing infrastructure, facilities, and capital equipment. But they don’t necessarily see them as material risks. Public companies tend to provide much more information on how a changing climate could affect them in voluntary reports than in their mandatory securities filings. In addition, we’ve seen cases in the pipelines, chemicals and fertilizers, and utilities sectors of businesses disclosing material risks posed by severe weather, water availability and quality, and seasonality (a source of operational risk), but not in the context of a changing climate.

Terminology, risk perception, short-termism, and capacity impede businesses’ progress in assessing and managing risks and opportunities of climate change. Confusion remains between mitigating GHG emissions, adapting to GHG emissions mitigation policy, and adapting to future climate itself. Some businesses don’t see the need or the economic rationale to transform core practices and business strategy in anticipation of future impacts since businesses routinely manage risks and opportunities relating to extreme and unpredictable weather; instead, they think adjustments can and should be made as impacts occur. Some risk and operational managers see the need but have difficulties expressing business risks and opportunities in metrics that are meaningful to executives and show the costs of not adapting.

But a business case is apparent. The climate is already changing and businesses stand to be impacted directly and indirectly. Adapting to a changing climate builds resilience to today’s weather and water-related risks. Also, implementing adaptive measures doesn’t have to be complicated or costly, can benefit stakeholder relations, and can help move a business ahead of its industry peers.

0.3 Learning from “Climate Pacesetters”

The experiences of 13 pacesetting businesses set out in our Facing the Elements: Building Business Resilience in a Changing Climate – Case Studies Report show that businesses are already confronting the adaptation challenge and point to four key factors motivating action today: the ability and inclination to connect the physical impacts of climate change and related risks or opportunities to business objectives, awareness of stakeholder expectations about environmental and social performance and a commitment to sustainability as a business imperative, strong risk-management practices, and previous experience with climate-related events or impacts.

Their experiences also demonstrate that it’s advantageous and possible to act now to prepare for future climate realities. Perceived benefits lie in both value protection, by reducing existing weather and climate-related risks, and value creation, by exploiting opportunities and strengthening market positioning relative to peers. In the long term, benefits accrue by incorporating climate change into capital investments so that assets continue to perform reliably in the future. Taking stock of risk exposure and viable options for risk control ahead of stakeholder demands for this information is also of value. Their experiences illustrate how to follow the NRT dashboard for business success in a changing climate presented below.

Because risk management and entrepreneurship come naturally to business and industry, it’s safe to assume that a degree of private-sector action to adapt to climate change will proceed without government intervention. However, our research revealed the need for support from government and organizations that engage with businesses (industry associations, banks, institutional networks, environmental organizations, etc.) to overcome five barriers: vulnerability through interdependencies, lack of policy and regulatory support; gaps in information and tools to aid decision making, lack of financial incentives from government, and lack of shareholder and investor commitment and support.

0.4 Building resilience

Although by no means a comprehensive picture of unique and cross-cutting needs by Canada’s industry sectors, the analysis in this report led us to draw three conclusions. First, organizations that engage with businesses must raise the profile of climate change risk management and adaptation as a business issue as opposed to an environmental one. Targeted communications to clarify how adapting to climate change is a departure from business-as-usual, why and when anticipatory action makes sense, and what the costs are of not adapting will help inform businesses’ risk calculations. Second, to enable action, governments and business alike must embed adaptation within existing risk-management mechanisms and processes. Third, both small, practical steps and systemic changes are necessary to ensure business resilience in a changing climate. Systemic barriers, such as a focus on quarterly performance, are not unique to climate change adaptation, but nonetheless weaken incentives to plan ahead and invest in long-term measures.

To enable capacity and action by Canadian businesses to adapt to the impacts of climate change now and in the next five to ten years, the NRT recommends the following goals:

GOAL 1 // TAILOR CLIMATE CHANGE INFORMATION TO ADDRESS BUSINESS ADAPTATION NEEDS: Government agencies and research organizations generate and disseminate information of value to businesses that are planning for climate change. But much more could be done to expand the use of these information resources by business. What’s needed is a basic understanding of business needs by industry sector and follow-up actions to improve access to reliable, relevant, and user-friendly climate change information and related guidance.

GOAL 2 // AUGMENT INVESTOR INFORMATION THROUGH BETTER CORPORATE DISCLOSURE: Quality disclosure is the foundation of strong capital markets; this includes disclosure about material risks from climate change and its impacts. Despite guidance to the effect already issued by the Canadian Securities Administrators, climate change risk disclosure in financial filings is limited, at best. Better enforcement of disclosure requirements is necessary, as are effective approaches for companies to demonstrate the value of climate change risk management and adaptation actions to investors.

GOAL 3 // ENHANCE THE RESILIENCE OF CRITICAL INFRASTRUCTURE: The resilience of our critical infrastructure — both public and private — to the impacts of climate change is key to our economic prosperity: companies that can’t access essential services or efficiently get their products to market face competitiveness risks as a result. So, we must capitalize on existing processes and mechanisms to understand the economic risks we face and to encourage owners or operators to assess infrastructure risks posed by a changing climate and implement management actions where appropriate. And, since companies must also account for climate vulnerabilities in critical infrastructure systems in their business plans, providing access to this information is also important.

GOAL 4 // PREPARE NOW FOR FUTURE POLICY INNOVATION: Efficient and effective management of climate change risks and opportunities requires both public and private sectors alike to plan ahead. Governments must anticipate the need to correct for market failures hindering long-term adaptation by business. A forward-looking approach by government that integrates new investments in science and research, explores the potential of market-based instruments, and monitors the availability and affordability of adaptation solutions, intervening when necessary, will help position Canada to adapt and prosper in a changing climate in the decades to come.