Managing Climate Risk

Brendan Harrison's Down to Earth landscaping company had to stop planting in St. Louis this summer. But he’d already hired workers for the season back in spring. How could he know he’d face the most extreme drought in at least a generation?

USDA's running tab of states and counties experiencing drought conditions.

This drought represents an interesting challenge in climate change that intrigues me. Prudent business leaders know they must treat climate change as a risk they manage in the same way as other risks. Thinking of climate change this way gives them access to the impressive resources of the risk management community (See for example, the Institute of Risk Management), and provides a framework in which to discuss the issues in a business-like fashion with their colleagues and subordinates. The challenge I face is helping these business leaders understand and properly address climate change risks.

At the most basic level, risks can be systematic or unsystematic. A systematic risk applies to a broad category of assets. Seems like a good description of climate change. For example, if temperatures are rising globally (a hazard risk), all of our facilities may be at risk of higher costs for air conditioning or cooling (a financial risk). Or if I am in the agricultural industry, all of my crops, in all locations may suffer productivity losses. Risk managers remind us that systematic risks are hardest to manage mostly because they can’t be avoided by diversification.

Complexities of climate change. Source: IPCC 2007

But can climate change create unsystematic risks? An unsystematic risk is one that may be specific to a particular industry or location. How can it be that climate change can create both systematic risk and unsystematic risk?  The answer lies in the hugely complex system affected by climate change. It involves everything from weather patterns, to sea level rise, and crop failures, and from heat stress on vulnerable populations to changes in disease patterns.

As an example of an unsystematic risk, consider the last item in that list, disease patterns. Higher temperatures can dry out some areas like the drought in over half the US; but makes others more humid, particularly areas near water bodies. And the increased humidity can help microbes that infect humans. The effect is local and is limited to certain times of the year, such as the hottest part of summer. That is an unsystematic risk.

If my company happens to have a factory nearby and my workers live in areas exposed to those microbes then it’s a risk for me. So climate change can create systematic risk that is hard to manage corporate wide, and unsystematic risk that may be off the radar screen of headquarters but can wreak havoc on the whole supply chain if my plant is a bottleneck and employees call in sick for an extended period (an operational risk).

These risks are widely appreciated in the financial community. For example, the Financial Times reports that two-thirds of asset managers consider climate risks in portfolio management. This proportion is likely to grow. Just this June, the British Government announced that firms listed on the Main Market of the London Stock Exchange would be required to report their greenhouse gas emissions.

The reasoning is that those emissions constitute a policy risk if they are subject to nationally or internationally imposed limits. Is it a systematic risk? It will be hard for individual corporations to address that risk since most of the emissions are inherent in the energy production system of the nation, and the world.

But it is possible. For example, many IT companies that are so dependent on huge energy supplies have diversified their energy sources away from fossil fuels towards wind, solar, hydro, and other renewable sources. Just switching from coal to natural gas can cut your greenhouse gas emissions in half. This would constitute a strategic risk for the coal company. So IT companies face a risk that, on the surface appears systematic but when approached imaginatively may turn out to be not so systematic, and become a differentiator among companies.

It may also become a differentiator among business leaders. Those who fail to deal with these risks will no longer be deemed prudent. Brendan Harrison may plan differently next year.

Planning for the Worst is Job One

The dog days of summer seemed to start a bit early this year. With fresh memories of “super derecho,” DC metro blackout, and lack of A/C in sweltering heat, I found myself enjoying some well-deserved leave time in Eastern Europe despite some unusually warm weather there as well. The good news is that there were no massive blackouts due to A/C loads, but the bad news is that there really wasn’t any A/C to speak of in the village. However, India didn’t have the same luck, with its residents, business, and economy enduring the “worst blackout in India’s history.” Reports of the transportation snarls, banking disruptions, and doubt over economic prospects seemed to surface rapidly. Returning last week, the news of US drought, call for disaster relief, and prospects of higher food prices seems to reinforce the universal lesson that brutal weather and climate impacts can have both very personal and national economic implications.

While many of us in the lower to middle latitudes are just trying to stay cool, keep the power on, and calculating corn futures, the Arctic ice pack extent numbers seem to be on track for record year, smaller than even 2007’s record.

Credit: National Snow and Ice Data Center

This summer’s season’s record ice melt seems to validate the Navy’s call to develop their Arctic Road Map and war game the national security implications emerging from greater Arctic access.  Earlier this March, the Naval War College (NWC) released the findings report from the multinational Fleet Arctic Operations Game (FAOG), which held last September. Prior to its release, Admiral Jonathan Greenert, Chief of Naval Operations, suggested that the war game emphasized the need for international maritime cooperation. However, just this week, the NWCs’ Weekly Maritime News Survey referred readers current articles discussing Russian and Chinese interests in the Arctic.

If the FAOG war game enhanced multilateral collaboration, recent discussions on the Air-Sea Battle (ASB) framework have certainly not enhanced our mil-to-mil relationships with the Chinese military. While this reported ASB scenario focuses on a hot conflict with China, the DoD’s Office of Net Assessment's model may hold promise to help inform the capabilities need for the Arctic operational needs identified in the FAOG war game. These professionals are paid to think through the worst case scenario so our military services can make the case for balanced capabilities that can mitigate the impact of low probability, high-consequence security risks.  

In my chapter on Climate and National Security, I’d emphasized the need to use scenarios and war gaming to not only think about a changing climate’s known unknowns but supporting our national security professionals in identifying the needed capabilities, gaps, and solutions, such as multilateral collaboration with our arctic allies (and competitors) who have those assets. Incorporating climate implications into our national security scenarios and war games is timely and needed to think about the threats of a 21^st Century future security environment.



Credit: DiGirolamo, SSAI/NASA GSFC and
Allen, NASA Earth Observatory



For example, a friend sent me an article during my leave about the rapid melt event in Greenland during the second week in July.

While current science can’t definitively tell you whether this rapid melt was a result of 150-year cycle, climate change, or some combination of both, the implication is that our military scenario makers can use such phenomena as inspiration, particularly when considering “worst-case” scenarios. As with the Arctic, war games focused on mild (0.5-meter sea level rise), moderate, or worst-case (7-meters) Greenland ice sheet melt can be valuable in thinking through the enormous national security implications, needs, capabilities, and gaps from such sea level rises. Regardless of nature of the threat, our military’s planning and preparing for the worst is job one.

Once we’ve done that, it brings us to early warning systems but that is a post for another day.

Mixing Things Up: Changes in the U.S. Power Generation Fuel Mix are Helping to Reduce GHG Emissions

As an economist, a big part of my career has been spent trying to understand trends and changes to the status quo, and how their impacts are felt. I recently began looking at power generation fuel substitution and some of the changes occurring in this area.

For many decades, the U.S. has been slowly decarbonizing the fuel mix it uses to generate power. Here’s a chart I put together that shows the relative shares of coal, oil, natural gas, nuclear, hydropower and non-hydropower renewable sources over 50 years, between 1960 and 2010.




As you can see, coal, oil and hydropower lost market share, while natural gas, nuclear and non-hydropower renewables gained. Overall, the carbon intensity (carbon/BTU of energy) of the U.S. power generation mix dropped by roughly 15 percent from the beginning of the period till the end.

We can also see from the chart that the trends were particularly strong in the first decade of the 21st century, from 2000 to 2010. But what’s happened since then? A second chart shows the same trends from the beginning of 2011 through May, 2012 (the latest available data from the U.S. Energy Information Administration).




Over this short time period, coal continued to lose market share while natural gas and renewable sources other than hydro gained. Because of this substitution, the carbon intensity of the U.S. power generation fuel mix dropped by another 13 percent.

What is likely to happen to this carbon intensity in the future? The Department of Energy has projected the future U.S. power generation fuel mix through 2035 and believes that it is likely to continue towards higher proportions of natural gas and renewable sources and a reduced share of coal. If that happens, U.S. power generation fuel carbon intensity will continue to decline.

Though this declining carbon intensity doesn’t solve the greenhouse gas problem, it helps. And a lot of it is happening because market forces in the U.S. are pushing power generators to make the indicated fuel substitutions. Things aren’t necessarily the same in every country, but in many the same market forces likely will push local power generators to make similar substitutions.

Media roundup

A few media leftovers for a slow summer’s day...
On the heels of Rachael Jonassen’s recent post on why corporations are addressing climate change, a quick piece by the Weather Channel’s Carl Parker on what some of the private sector’s most prominent members are saying.

     

Here's a great (albeit long) discussion of our recent weather, including a nice explanation of how this fits in with the climate change discussion by comparing the recent weather to Major League Baseball's "Steroid Era."

Finally, while I was doing some housecleaning, I remembered that I hadn’t yet shared the audio of an interview I did with WNEW-FM (99.1), the new CBS NewsRadio station here in the Washington, DC area. Here are the two pieces done by WNEW’s Chas Henry, in which we discuss the national security implications of climate change.

Why Companies Address Climate Change

Arne Mogren spent over two decades at Vattenfall Energy Company in Sweden. He remembered when he began work at Vattenfall there was just one person working there on wind energy. Today there are 500! Wind is just one of the areas where employment in climate-related industries has exploded. Solar, energy finance, carbon trading, biofuels, energy retrofits, automobiles, carbon capture… all are growing opportunities for employment, and profit.

Not too many years ago, it was unusual for companies to hire climate change experts at the senior level. Now, companies looking for growth opportunities look for a senior level picture of the landscape. And all companies need a strategic vision of how they fit in this new landscape, how they can shape it to their needs, and how they can benefit from the new opportunities.

And even as agile companies jump on the new opportunities for growth through new products and services, they must respond to new internal needs and new structural challenges posed by climate change.

Agile businesses now have climate change to consider.

Let me give just three examples that help to illustrate why your company needs to rethink internal process and infrastructure issues.

Absenteeism is always a concern in a company but successful companies have found ways to address it. Employee health is a leading cause of missed workdays and heat stress is one important contributor. This summer a record setting heat wave extended from Washington DC to the middle of the country. The average temperature for the entire US in June was 2°F above the average for the 20^th century. The most recent twelve months was the warmest ever observed (back to 1895). Such great heat, and for such long periods, is the real culprit in heat stress related illness and employee missed work. How will your company, and your employees deal with this?

This heat hurts employees, and it hurts logistical operations for companies. If you rely on railroads to transport your products, or to get raw materials, you probably noticed some issues in delivery as rails buckled in the heat and trains were slowed, redirected the long way around, or simply unable to operate. Even the Metro here in Washington had to adjust to buckled rails. Smart companies understand that this may become the new normal and have planned for it.  Indeed, really smart companies are planning ways to offer new goods or services because they see this as an opportunity. 

The Metro Green Line in Washington, DC, is inspected for ‘heat kinks’ that cause the tracks to buckle dangerously.

But it’s not just your employees and logistics that the heat affects. It also can impact your infrastructure in many ways. Certainly the cost of cooling was a big issue this month. And if you are dealing with perishable goods such unplanned expense impacts your competitive position.  You may have heard of all the restaurants giving away food that was going to spoil. Did they plan for the heat?  Did they plan for lots more months like this?  Did they think about increasing insurance for this? Do the insurance companies have products for the increased risk? Well, it turns out that the big reinsurance companies like Swiss Re and Munich Re have been developing risk models that incorporate climate change for two decades. They might be a winner in this new world. The restaurant owner: he or she might be a loser. Which do you want to be?

Balancing Act: Technology and a Changing Climate

We love our technology.

Consider how we follow it, with blogs and columns devoted to following the top innovators in the same way we follow our favorite sports team. Consider how it permeates all facets of our lives, from home to work, from the car we drive to the way we shop. And when you realize what technology means to us, it’s abundantly clear that we need to protect it, and while keeping its impact on the safe side of harmful.

So that’s the double-edge sword: we can leverage technology, information and emerging processes and platforms to help answer a changing climate’s mitigation and adaptation questions. And at the same time we must be acutely aware of what our technology does to the environment.

In the book, we used Google as a good example of how computing can drive greenhouse gas (GHG) emissions.

Granted, there’s some disagreement as to how much CO2 is put into the atmosphere—but no one disputes the fact that it does. But for the sake of this discussion, let’s stick with Google’s assertion that a single web-based search generates about 0.2 grams of CO2. According to the search engine giant,

“...the average car driven for one kilometer (0.6 miles for those in the U.S.) produces as many greenhouse gases as a thousand Google searches.”

So how much data is being used, if we accept that the many, many Google searches that take place each day are just the tip of the usage iceberg? Consider this infographic, which can be mind-blowing.

It probably took you more than a minute to digest this, meaning the numbers are now bigger.

So clearly we have a responsibility to support technology that helps lessen the impact of data usage to atmospheric GHG, and in turn support innovation that further addresses this concern.

Still, our technology must be protected, certainly from the impacts of a changing climate. It’s central to so much that we do. A recent post on the WashingtonPost.com Wonkblog reinforced just how much air conditioning has revolutionized our lives, from our economy to our comfort to our diets. It cites this study by Northwestern University researchers that makes the case that high temperatures left unchecked by the magic of central air can result in severe cuts to economic output, worker productivity, political instability, and in severe cases, fragile states that become threats to our national security. So there’s that to consider. As the recent Super Derecho of 2012 taught us, we need our technology intact to power the electrical grid, to help us maintain contact with critical services and loved ones, and to avert a public health crisis when temperature either drop or skyrocket.

Also, consider that the Google searches that I mentioned earlier could in fact be providing people with the information they need without driving to a library—so it’s not all bad to have this capability in hand.

The balancing act comes to a head when a company makes a decision that seems to fly in the face of sound environmental policy. The world’s most valuable company, Apple, Inc., is itself dealing with that quandary right now.

Until last week, 39 of Apple’s products sat comfortably on the list of devices certified by the Electronic Product Environmental Assessment Tool. That is, until Apple requested that the organization remove those 39 products. Why is this significant? The move effectively removes Apple from being part of some public sector procurement efforts—San Francisco, for one, whose Department of Environment sent a letter to their government agencies announcing that Apple laptops and desktops are no longer qualified purchases.

Apple responded by explaining their frustration with the EPEAT standards, which even the governing organization admits are old. And to Apple’s credit, they’ve been at the forefront of positive news for their efforts to develop green data centers to support their various cloud-based services. Apple’s not alone—Google and a host of other tech companies have been very open about their efforts to lessen the GHG impact of their operations. 

 Apple recently won approval to build a 20-megawatt solar farm at their new data center in North Carolina

We can’t run from technology just because it’s a burden of the environment; it’s just too important to what we do, and what we need to accomplish on a day-to-day basis. And we need to ensure that the infrastructure is in place to keep our world running (that’s the adaptation side of this). But much of the mitigation efforts that some think is still a means for slowing climate change impacts can be fueled by technology, just as it can be inhibited. So a conversation needs to happen now. We need stakeholders at the table to figure out what works best—and how we’re going to make it happen.

Lessons Learned from an Epic Storm

At LMI’s annual Family Picnic on Saturday, the hot topic of conversation was the devastating impacts that the region endured beginning with Friday night’s epic storm. On a day where temperatures easily exceeded 100°F, many, if not all the people I spoke with didn’t yet have power at home. Today’s Monday Tuesday and many of them still don’t.

We can’t say this event, labeled an “in-land hurricane” by some, a “super derecho” by others, is related to a changing climate. I’d just as soon rather not dwell the cause, and focus on the facts.

This event:

·         Lasted 12 hours during its 700 mile run from Indiana to the mid-Atlantic coast

·         Featured gusting winds in excess of 70mph, with some places experiencing 91mph gusts

·         Left more than 1 million without power in the Washington, D.C. area alone (and 2.2 million overall, with “catastrophic damage” to the electrical grid).

The ferocity and timing are amazing to consider. That a storm could sweep through (And quickly! At my house it was a violent half hour and then it was over) and coincide with record high temperatures, is something few could have expected.

Consider the broad impact: the storm damage has disrupted infrastructure and the supply chain, along with regional IT and communications capabilities—parts of Northern Virginia were without 911 services for the entire weekend, and major cloud-based services operated by Amazon, Netflix, Instatgram and Pinterest were among the casualties. These were not small fish that were knocked out, reinforcing just how bad things were.

Add to that the public health issues. Already, the region was bracing for high temperatures—with the standard alerts and warnings that come with a forecasted heat wave. But no one envisioned such an event in which people would be forced to deal with the heat without the benefits of power for air conditioning, cell phone service for checking in on loved ones and coordinating activities, or clean water to drink.

A woman and her great-granddaughter at a Red Cross cooling shelter in Lynchburg, Va. Photo credit: Parker Michels-Boyce/AP

Again, whether or not climate change is at the root of this remains inconsequential so much as what organizations are prepared to do to adapt to these types of events.

This is the type of cross-functional impact that we talk about in our new climate change book—events with impacts that cross over to other areas and demand collaborative action from a multitude of agencies and stakeholders on every level. Whether they represent the private or public sectors, organizations have got to begin developing plans of action to account for their people, processes, and assets when debilitating events occur.

Whether it’s a better system for early warnings, using social media for first response, building hardened infrastructure, or adapting your supply routes, these are wise strategies that should be adopted by state, local, and federal governments, and supported and adopted by private sector organizations. It’s the smart thing to do. And if we do have an event that we can definitively chalk up to climate change, then we’re that much better prepared to respond.