Impact and Disclosure of Climate Related Risks for Businesses
Driven by cost efficiencies and the need to comply with legislation, many companies have already made great effort to reduce their greenhouse gas (GHG) emissions. But are they prepared for the consequences of climate change? Cases of extreme events that cause economic losses and devastation globally are increasing in number, and the severity of these events has been magnified by climate change. Building up physical and social resilience is key for businesses, in particular when much of business today relies on global supply chains vulnerable to extreme weather events.
To avoid catastrophic climate change, there is a global consensus to keep global warming well below 2°C above pre-industrial levels, while trying to limit temperature increase to 1.5°C1 by the year 2100. Last year, in another milestone on the road towards a global climate policy, 169 countries and the European Union agreed on the rulebook to adopting the implementation guidelines of the Paris Agreement at the Katowice Climate Change Conference. Whilst the rulebook sets the rules and targets for countries to implement their climate pledges, business is one of the main driving forces behind it.
Before business leaders can take effective climate action they must address two key questions:
- What are the climate-related risks that have the potential to impact my business?
- How much will climate change adaptation cost?
The Intergovernmental Panel on Climate Change (IPCC) provided details in their 5th Assessment Report of the possible impacts across Asia, including extreme weather, more intense or frequent storm events, rising sea-levels and damage to infrastructure. While the potential impacts are location, business and industry specific, it can be useful to look at a case study to get a sense of the scale of the issue and how to approach it.
Climate change risks and impacts: Lessons from the shipping industry
The shipping ports industry in Asia is critical for global trade. Nine of the top ten ports in terms of capacity are in the region, and they are more vulnerable than other ports around the world to climate risk2. Typhoon Meranti showed how impactful climate change can be on ports. The tropical storm battered the port of Kaohsiung, Taiwan, in 2016 with winds of up to 370km/hr, causing US$32 million in damage as cranes were destroyed and berths damaged by ships that broke free of their moorings3.
To avoid such damage, a report commissioned by HSBC has estimated a potential climate adaptation cost of between US$31 billion to US$49 billion to future-proof 53 of the Asia’s largest ports. The report projected climatic conditions between 2070 and 2100 with two different climate scenarios according to different Representative Concentration Pathway (RCP) trajectory, sea level rise, required elevation for ports, storm intensity, storm surge and different engineering assumptions. Table 1 summarises the information from the report regarding the abovementioned assumptions following these three inter-connected questions:
- How will weather patterns will change?
- What engineering solutions can ports use to address these?
- How much will the solution will cost?
|Representative Concentration Pathway||Sea level rise||Required elevation||Storm intensity||Storm Surge||Adaptation cost estimates for Engineering assumptions A (10% of building and warehouse areas will be elevated)|
|Adaptation cost estimates for Engineering assumptions B (30% of building and warehouse areas will be elevated) (US$ billion)|
|Climate Scenario 1||RCP 4.5||Between 0.3m-0.6m||1.6m||Average storm intensity increases 10%-20%||Storm surge increases by 0.5m to 1m from base assumption of 5m|
|Climate Scenario 2||RCP 8.5||Between 0.45m-0.8m||2.3m||Average storm intensity increases 20%-30%||Storm surge increases by 1m to 1.5m from base assumption of 5m|
Table 1. Estimated capital costs to elevate 53 of the largest Asia ports to projected climatic conditions between 2070 and 2100 with two different climate scenarios.
The main takeaways from the report have relevance beyond the shipping industry for businesses eager to guarantee they are climate change ready:
- Early planning makes economic sense. In general, it will be considerably cheaper to build a port with a greater height than to elevate it later. Therefore, planning ahead is more important than fix the problem later on;
- Adaptation costs are often higher in developed countries due to higher material and labour costs. In the instance of ports this is due to the fact that ports in developed countries have higher proportion of buildings and warehouse areas which are significantly more expensive to elevate than yard areas;
- It is not much more expensive to adapt to an aggressive climate scenario than a moderate one because fixed costs are high, the more aggressive climate scenario resulted in only 4-5% higher adaptation costs;
- Costs are more sensitive to engineering assumptions than climate scenarios. The cost difference between engineering assumptions A and B are higher than the cost difference between climate scenario 1 and 2.
Disclosure on Climate-related Risks and Opportunities for Businesses
Understanding climate-related risks, impacts and costs is one side of the story, what does this mean to organization’s strategy and financial plans under different plausible future states of the world e.g. 2°C or a 4°C scenarios and short, medium, long term planning. Moreover, how do we communicate with our stakeholders so that they understand the risks in a more transparent way? Companies that initiate the thinking process earlier also stand to take advantage of opportunities and plans to mitigate or adapt to the risks.
The Task Force on Climate-related Financial Disclosure (TCFD) is a voluntary, consistent climate related financial disclosure reporting framework that is extremely useful for stakeholders in understanding material risks through disclosing information under four areas of the business: governance, strategy, risk management and metrics & targets.
Even though it was only launched in 2016/2017, TCFD already boasts huge support from the financial and non-financial industries to report relevant information in annual mainstream filings. According to the Status Report published in 2018, companies as diverse as Bank of Montreal, Danone, Diageo, Royal Dutch Shell, AP Moller-Maersk Group and Unilever have already initiated their TCFD reporting in 2017/2018.
We foresee that TCFD recommendations will become widely adopted by organizations so to ensure the effects of climate change will be routinely considered in business and investment decisions. It will also help companies better demonstrate responsibility and preparedness towards climate change issues and ensure a smooth transition to a more sustainable and low carbon economy.
CSR Asia is already helping forward-thinking companies to understand their climate risks under different future scenarios and begin their disclosure journey with TCFD. To find out more about how we can help your business contact me at [email protected].