Flashing signals….What businesses shouldn’t ignore about climate change

Updated: Nov 6, 2020

Whilst the issue of climate change is often looked at through the lens of community and domestic upheaval, more light has to be shone on how it is affecting businesses. From the context of strategic development, executives rely on scanning systems to probe their business environment. They aim to understand the business ecosystem that envelops their operations. In this way, they can determine the best way to achieve their business objectives. Those that pay attention detect signals. They value the currency of information and appreciate that indicators matched to cohesive responses avoid otherwise perilous outcomes.

The Late Winston Churchill stated that “Men occasionally stumble upon the truth but most of them pick themselves up and hurry off as if nothing ever happened”. And perhaps that’s the likely fate with climate change.

History suggests that all great tales of disaster are never as spontaneous as they seem. From the tales of great financial disasters (2008) to those of war heroes (Pearl Harbour); ignored signals always precede disastrous events. Generally, it has been acknowledged that climate change has been altering weather patterns. It is leading to biodiversity declines, sea level rises and changes in frequency and intensity of storms. Over the last decade, the frequency and severity of extreme weather events have increased around the world. Events are also shifting in geographic parameters. Flood risks are rising in the northern parts of the US and declining in southern areas. Fishing that once flourished in colder Alaskan temperatures are now suffering a dearth due to migration of fish from warming waters.

Trinidad and Tobago is becoming more and vulnerable to changing weather patterns but has the link been made at the enterprise level? It is important that economic decision making that influence investment plans be reflective of the global trends that exist. This demands a greater need for managing climate resilience at the organization level. The Intergovernmental Panel on Climate Change has projected that the Caribbean region is projected to see an increase in temperature of between 0.94 to 4.18 degrees Celsius while rainfall is projected to undergo changes of between to -49.4% to -28.9% by 2069 (relative to the 1961-1990 period). Sea level is also expected to rise 15 to 95 cm by 2100. Trinidad and Tobago has been experiencing temperature increases for a while with projections of temperature to increase by 0.29 Celsius per decade. If these projections of the Trinidad and Tobago Meteorological office (TTMS) hold, it is possible that the length of the dry season can increase by 8% by 2050.

These are not just impossible warnings from overreacting scientists. We are experiencing those effects now. After an atypical dry season in 2019, rainfall levels were actually 37% to 59% below average in Trinidad and 20% to 26% below average in Tobago. The last time such conditions were experienced were back in 1959! In fact it was the 9th driest wet season in 74 years. 2020 has made its entrance and a full recovery is yet to have occurred. We have seen these reflected in the depletion of our reservoirs at Arena, Hollis and Navet. Due to the natural rainfall variations that occurs throughout the country, reservoir deficits have trended from 29.4% to 40.3%.

Trinidad has also experienced the wreckage that ensues from perennial floods, loss of coastal habitats and rising sea levels. For my kindred spirits who also enjoy trips to the Eastern and Southeastern Coasts of Trinidad, the destruction is hard to ignore. Cliffs and nearshore areas are retreating with erosion. The inundation of high energy waves have been battered Manzanilla, Cocos Bay, Mayaro and Guayaguayare. In some areas the losses amass to 300 meters.

Business plans are made on 2 to 10 year time horizons with the underlying assumption that the impact of climate change is a long way off. In 2019, outgoing Bank of England chief, Mark Carney acknowledged this by labeling climate change the tragedy of the horizon. This indifference is harmful when one considers the role that extreme weather events and the low carbon transition can have on rendering some types of assets worthless. Climate change introduces financial risk into a business from a physical perspective where assets and life can become imperiled by floods, droughts and floods. It also presents transition risks due to the adjustment to the low carbon economy. Redirection of foreign investment from multinationals (BP and Shell) and changing modes of operations will influence skills availability, construction and manufacturing costs.

Climate change as a corporate social responsibility issue is an outdated concept. It has evolved into one of the most significant business risk. In 2019, the electricity company PG&E declared the first climate change related bankruptcy. This was due to liabilities of more than $30 billion that resulted from wildfires that swept its California service area in 2017 and 2018. Global warming and climate change were identified as the triggers for the extremely hot, dry conditions that spawned more frequent and intense fires. Small enterprises are also particularly exposed. A study conducted by the US National Flood Insurance Program revealed that over 40 percent of US-based small businesses do not recover from weather-related disasters. In the Caribbean, where residences and businesses reside near coastal areas or watercourses, the percentage would likely be higher. During the floods of 2018 in Trinidad and Tobago, a career farmer, Nathaniel Mungal, was so desperate to save his 70 pigs from floods that he let the animals free to seek refuge on a nearby hill while the flood engulfed his farm. He lost several ducks, goats and food crops during that event. That was neither his first nor second bout with flood related financial losses.

For the global insurance industry, 2018 was the 4th costliest year since 1980 for insured losses. According to Munichre, billions of losses were accumulated due to floods, tropical cyclones in the US and Japan, wildfires and earthquakes. Of the US$160 billion in losses, only US$80billion was insured. North America accounted for 68% of insured losses, Asia for 23% and Europe for 8%. The remaining losses of less than 1% were divided between South America, Africa, Australia and Oceania. Underwriters in developing countries are often not willing to provide coverage against natural hazards due to their limited resources and smaller capital base. Disasters without insurance can lead to financial catastrophe and cripple economies. This leaves these areas defenseless.

Risk response plans are urgently needed. True organizational resilience can only be built with considerations of the new global economy. Enterprises must therefore identify areas of vulnerability and integrate these risks into strategic planning and growth objectives. Focus should be on preserving assets, reallocating resources and relooking how investments are valued when climate matters are considered. I invite you to peer out your window! The weather is sending you signals. It is shouting, directing, cautioning and portending of shocks ahead.

Will the message be received?