Updating our Climate Risk Framework
In the summer of 2016, I blogged about Forum for the Future’s emerging thinking on climate risk and shared the first version of our ‘wedge-and-circle’ climate risk framework (which we use to build corporate and investor awareness of climate risk).
This framework not only illustrates the wide variety of risks that climate change poses (the wedges), but also highlights the fact that these risks do not just apply to corporate assets and operations, but also to supply chains, markets, and the public infrastructure – and even the social cohesion – upon which all companies rely (the circles).
Well, we have now come up with an updated version:
So what’s changed?
Well, firstly, we think the new version looks a lot better (and is a lot less cluttered)…
More substantially, we’ve given more prominence to the physical risks of climate change – and we’ve created space to explicitly consider the potential for climate change to result in shifts in climate patterns, as well as the ‘deviations around the norm’ that typify the current impacts of climate change.
We’ve made this change this because, if we cross the 2°C threshold (and perhaps even if we don’t) then ‘disruptive shifts’ in climate patterns are, alas, a possibility.
It is, of course, impossible to accurately predict how and when such Rumsfeldian unknown unknowns might manifest. And, in a worst case scenario, such shifts could be civilisation-threatening, never mind disruptive to a corporate business model. But it’s important that such possibilities are at least ‘in the mix’ when discussing climate risk – if only to help make the case that any company that wishes to truly protect itself should be pulling out all the stops to ensure we don’t cross the 2°C threshold.
Beyond these changes, our ‘ground rules’ for any company that wants to think through its exposure to climate risk still stand:
Climate change will not only impact corporate assets and operations – it will also impact supply chains, markets, workforces, and the broader infrastructure upon which they depend.
It is important to consider the widest possible range of impacts, including low-probability outcomes with potentially large consequences.
As well as posing discrete risks of its own, climate change will interact with and exacerbate other risks (e.g. relationships with government and/or commercial partners, or the availability and efficiency of labour).
Current climate impacts/trends are not a reliable indicator of impacts-to-come – the future will be more disruptive, and will include ‘surprises’ as well as trends.
The corporate approach to climate risk must therefore be dynamic and adaptive.
Climate change poses significant enough risk to mandate regular consideration and discussion at senior management and board level.
A consideration of climate risk must be built into standard business management processes and embedded across all corporate divisions (i.e., it cannot be the sole responsibility of the sustainability team).
No one company acting alone can truly ‘protect itself’ against climate risk. Partnership and collaboration – pre-competitive, in and across industries, and with government and communities – will be key.