Climate Risk and Business - Practical Methods for Assessing Risk - International Finance Corporation
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Acknowledgments © 2010, International Finance Corporation First printing, September 2010 Authored by Vladimir Stenek, International Finance Corporation Richenda Connell, Acclimatise John Firth, Acclimatise Michelle Colley, Acclimatise IFC and the authors wish to thank the management and staff of Himal Power Limited, Ghana Oil Palm Development Company and Packages Ltd. for their support and cooperation in the elaboration of the studies. The authors also wish to thank the numerous local experts and institutions listed in Annex 3 for their valuable contributions to the studies. This work benefited from support provided by the Trust Fund for Environmentally & Socially Sustainable Development (TFESSD), made available by the governments of Finland and Norway. Reviewers We thank the following for their critical review and comments: Peter-Martin Thimme (DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbH) , Alan Miller, Jamie Fergusson, Susan Holleran, and Katia Theriault (IFC). Editors Rachel Kamins, Anna Hidalgo, Vladimir Stenek, Richenda Connell Designer Studio Grafik Photo credits Vladimir Stenek, International Finance Corporation Chris Train, UK Environment Agency Packages Ltd.
Climate Risk and Business Practical Methods for Assessing Risk
Foreword Climate change creates both risks and opportunities for the private sector, particularly in emerging markets. Climate impacts may affect companies’ financial, economic, environmental and social performance, especially when they rely on long-lived fixed assets or have complex supply chains. Yet to date, the evidence for the significance of these issues has been poorly defined. Most climate change assessments express impacts due to changes in a limited number of parameters, usually average temperature and precipitation, over large geographic areas and on relatively long time- horizons. However, private-sector needs include shorter time horizons, focused on smaller geographic areas and information about impacts that is specific to the business. Very few companies and private sector stakeholders, particularly those that are smaller in size, many of whom are in climate sensitive sectors, have the capacity and resources to produce such information. Recognizing the gaps in knowledge of how climate change will affect the private sector and of the potential significance of the risks to investors, IFC undertook three pilot studies from 2008 to 2009, based on investments in developing countries. These studies aimed to understand gaps and barriers to private-sector climate risk analysis, to test and develop methodologies for evaluating these risks and, in this context, to identify possible adaptation responses and needs. Despite the challenges and uncertainties inherent in undertaking such assessments, the studies have been able to generate new information related to climate risks to a variety of businesses across different locations. They have also demonstrated some of the practical approaches that can be applied by businesses to understand these risks better, to react as necessary, and to reduce uncertainty about the future. Ultimately, the ability of businesses like those studied here to adapt to climate change will depend not only on their own actions but also on the actions that may be needed from the public sector, non-government organizations, the scientific community and other stakeholders. These pilot studies are an important first step in IFC’s broader initiative to develop an understanding of the implications of climate change for business. IFC will continue to support this type of analytical work, which is critically important to helping our clients, and the private sector more broadly, to adapt to the challenges and opportunities brought about by climate change. Rachel Kyte Vice President, Business Advisory Services International Finance Corporation
Table of Contents Foreword Introduction 1 The pilot studies 1 Approach to the assessments 3 Climate risks to investment performance 4 Adaptation actions 7 Lessons learned, uncertainties, gaps and barriers 9 Value of visit to client site and stakeholder engagement 9 Climate data 9 Assessments of risk to investment performance 12 Analysis and recommendations on adaptation actions 13 General results and conclusions 15 Most significant risks and uncertainties 15 Temperature-related impacts 18 From uncertainty to risk 19 Annex 1: A risk-based approach 21 Annex 2: Summary results of pilot studies 22 Annex 3: Acknowledgments 38 References 39
Introduction The main objective of the first set of pilot climate risk assessment The pilot studies studies undertaken by IFC was to test and begin to develop methods for Himal Power Ltd. Khimti 1 evaluating climate risks to the private hydropower scheme, Nepal sector and to identify appropriate Khimti 1 is a 60 MW run-of-river adaptation responses. This included hydropower facility, generating 350 GWh analyzing barriers and gaps preventing of electricity per year, located in Dolakha evaluation of risks and adaptation District, about 100 km east of Kathmandu. options, and understanding the roles The facility utilizes a drop from 1,270 to of different stakeholders (private and 586 m above sea level from the Khimti River, Khimti 1 power house and complex public) in addressing those constraints. a tributary of the Tama Koshi River. Khimti The studies also aimed to provide 1 was built and is owned and operated by Himal Power Ltd. (HPL) and, as a public- information that reduces uncertainty private partnership project, will be transferred to the Nepalese government in the about present-day and future climate- future. The timescale for this study was from the present day to the 2050s. related risks to the pilot study clients. In this context, the pilot studies should Packages Ltd. Bulleh Shah be viewed as an initial step towards Paper Mills, Pakistan elaboration of general tools for Packages Ltd. is Pakistan’s premier pulp and climate risk assessment and evaluation paper packaging company and has been of adaptation options, for use in the an IFC client since 1964. The company private sector. produces paper and paperboard, writing and printing paper, tissue products, and The first three studies analyzed flexible packaging products. It uses wheat Winding reels at BSPM Khimti 1 hydropower facility in Nepal, straw, recycled and waste paper, and Packages Bulleh Shah paper mills imported pulp in its production lines. The newly established Bulleh Shah Paper Mills in Pakistan, and Ghana Oil Palm (BSPM), near Kasur, have allowed the company to relocate existing pulp and paper Development Company (GOPDC). production facilities from its headquarters in Lahore to larger premises, enabling it This report aims to provide an to increase its production capacity from 100,000 to 300,000 tons per year. It also overview of the approaches used generates power on-site and sells excess power to the grid. The timescale for this in the studies and the challenges assessment was from the present day to the 2040s. encountered. It also provides tables which summarize the main results Ghana Oil Palm Development Company of the studies. Full reports providing Ltd. (GOPDC), Ghana more detailed data and analyses GOPDC is an integrated agro-industrial are available at www.ifc.org/ company with two oil palm plantations, at climatechange. Kwae and Okumaning in Ghana’s eastern region. GOPDC also operates a mill at The lessons learned from the pilot Kwae, where oil palm fresh fruit bunches studies included: are processed into crude palm oil (CPO) GOPDC plantation worker and palm kernel oil (PKO). Also at Kwae, • The most significant climate risks a refinery and fractionation plant processes up to 150 metric tons/day of CPO into on the timescales of relevance to olein and stearin products. The timescale for this assessment was from the present clients are where existing climatic day to the 2030s. vulnerabilities may be exacerbated Climate Risk and Business | Practical Methods for Assessing Risk 1
and critical performance or TABLE 1: RISK AREAS ANALYZED FOR THE THREE PILOT STUDIES compliance thresholds may be HPL Khimti 1 Packages Ltd. Bulleh crossed, as well as where systems hydropower scheme Shah Paper Mill GOPDC Ltd. are highly sensitive to changes in climatic factors. Power generation from Wheat yields Oil palm yield • With the rapid evolution of hydropower scheme during Power production from Oil palm pests and climate science, information on dry and wet seasons steam turbine and boiler diseases changes in the frequency and Extreme flood event on Groundwater resources Ecosystem services intensity of extreme climatic Khimti Khola and Tami events (e.g., heavy rainfall or Koshi rivers Wastewater treatment Refinery/fractionation major flooding), and potential plant plant Landslide blocking Khimti impacts and consequences for a Pulp and paper industry Power production Khola River and access business’ operations will become generally road to site Groundwater resources available. • Using downscaled projections Glacial lake outburst flood Community and social Wastewater treatment of global climate models for issues Increase in irrigation Malaria affecting GOPDC regions where these models are demand for agriculture workforce in good agreement can help provide better understanding of Local community Community and social changes at a local level. livelihoods issues • Publicly funded research can help to develop understanding of the relationships between climatic factors and their Methodology in time (2008/9), and that some impacts on different systems of the pilot study findings reflect and can build generic system The studies used a risk-based approach, the underlying uncertainties in models. Provided that such presented in Annex 1. The principal this evidence base. However, the models are made accessible, areas of risk identified during the ongoing and rapid advancement of private-sector stakeholders can process are listed in the table above. climate science – new research and adapt them to better represent new generations of climate models the specific conditions for their It is worth noting that the – is expected, in time, to provide investments. information about climate change increasing levels of confidence about and its impacts applied in the studies climate change and its impacts, was the best publicly available even in regions currently known for information at a specific point difficulties in climate modeling. 2 Climate Risk and Business | Practical Methods for Assessing Risk
Approach to the assessments CLIMATE DATA Figure 1: Trend in Observed Annual Average of Monthly Mean Temperature (°C) at Akim Oda Meteorological Station, Near GOPDC Plantations, 1970–2007 Observed conditions Changes in annual average of monthly mean temperature The studies required data on Annual mean temperature (oC) 28.0 observed and future climatic 27.5 conditions. Observed data were obtained from a variety of sources, 27.0 including the client companies, 26.5 national meteorological agencies, 26.0 and the Intergovernmental Panel on Climate Change Data Distribution 25.5 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Centre (IPCC DDC).1 These data were analyzed to provide a view of Annual Average Mean Temperature “baseline” climatic conditions against which future climate change impacts could be assessed and to identify any trends in the observed records. Scenarios of future The country profiles provide analyses By way of example, Figure 1 shows climate change of changes in the following climatic the observed trend in annual average parameters, year by year, out to temperatures recorded at Akim Scenarios of changes in future 2100, on an annual and seasonal Oda meteorological station, near climatic conditions were sourced basis: GOPDC’s plantations. The data show mainly from the United Nations an upward trend, with an increase Development Program (UNDP) • Mean temperature of 1.5°C having occurred over the Climate Change Country Profiles • Mean precipitation period 1970–2007. This represents (McSweeney, New, and Lizcano • Indices of extreme daily an increase of approximately 0.04°C 2008). These profiles were temperatures (from the per year and is an indication that the developed to address the climate 2060s onward), including the effects of climate change may already change information gap in frequency of “hot” and “cold” be underway in the region. developing countries. They provide days and nights multi-model projections of changes • Indices of extreme daily in future climatic conditions from precipitation (from the 2060s 15 of the most up-to-date general onward), including the circulation models (GCMs), as used proportion of total rainfall in the IPCC’s Fourth Assessment falling in “heavy” events, Report, for a range of different maximum 1-day rainfall emissions scenarios (namely A2, amounts, and maximum 5-day A1B, and B1).2 rainfall amounts. 1. Online at http://www.ipcc-data.org/ddc_visualisation.html. 2. For further information on the IPCC emissions scenarios, see the IPCC Fourth Assessment Report, available online at http://www.ipcc.ch. Climate Risk and Business | Practical Methods for Assessing Risk 3
As an example, Figure 2 shows Figure 2: Projected Percentage Changes in Monthly Average Precipitation in projected changes in monthly Nepal for the Dry Season (Dec/Jan/Feb) and the Wet Season (Jun/Jul/Aug) by average precipitation in Nepal by the 2030s, relative to the 1970–99 baseline the 2030s according to the country’s UNDP climate change profile, using Dec/Jan/Feb the A2 emissions scenario.3 On the timescales of relevance to the pilot study clients, no data were available from the UNDP country profiles on changes in the indices of extreme daily temperatures and precipitation. The limitations of applying GCMs to assessments at the scale of individual project sites are discussed below. CLIMATE RISKS TO INVESTMENT PERFORMANCE The data on future climate change Jun/Jul/Aug were used to assess risks to the performance of the pilot study projects. Undertaking these risk assessments required understanding of the relationships between climatic factors and the aspect of performance (i.e., the system) being considered. Source: McSweeney et al. 2008 3. The grids in the figure divide the area of Nepal by longitude (x-axis) and latitude (y-axis). Khimti 1 is located in the grid box highlighted in blue in the top figure. In each grid box, the central value (large number) shows the median of the 15 climate models, and the values in the upper and lower corners are the maximum and minimum model values. According to this analysis, the median change in monthly average precipitation projected for Khimti 1 is –7 percent (low to high range of –37 to +11 percent) for the dry season and +2 percent (low to high range of –23 to +43 percent) for the wet season. 4 Climate Risk and Business | Practical Methods for Assessing Risk
Where possible, these relationships Figure 3: Correlation between Malaria Cases per Month (%) and Number of were established based on data Rainy Days (Two Months Lagged), 2004–7, from St. Dominic’s Hospital recorded at, or close to, the pilot study site. For example, Figure Scatterplot of percentage of malaria cases per month vs. number of rainy days 3 uses data collected from St. per month (two-months lagged), 2004-2007 Dominic’s Hospital, the nearest 25 Number of rainy days per month hospital to GOPDC, to show the r=0.79, p
Finally, for risk areas where no Figure 5: Projected Net Reduction in Income at GOPDC Due to Impacts of Rising literature on climate change Temperatures on Refinery Vacuum Strength and Olein and Stearin Production impacts could be found, such as the industrial facilities at Packages and Projected average annual temperatures at Kwae from 2010 to 2030, and associated net GOPDC, the study teams were able annual financial impact ($) related to reduction in vacuum strength in refinery, to work effectively with the facility affecting olein and stearin production, with excess CPO sold instead (12% discount rate) managers and engineers to develop 31.7 8000 Net annual financial impact a good understanding of the risks to 31.6 7000 the companies’ performance. 31.5 6000 31.4 5000 Analysis of financial impacts 31.3 T(oC) 4000 ($) 31.2 3000 Where possible, technical/ 31.1 2000 operational, environmental, 31.0 30.9 1000 and social risks to client project 30.8 0 performance were translated 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 into financial risks. Achieving this depended on being able to apply Year a financial value to risks quantified Annual reduction in financial performance ($) Temperature (deg C) in physical terms. Broadly speaking, the financial issues analyzed can be Note: 12% discount rate applied. Rising temperatures will negatively impact the production of olein and stearin by raising cooling water temperatures, thus decreasing vacuum strength and categorized as: reducing the efficiency of GOPDC’s refinery operations. These figures assume that unprocessed crude palm oil will be sold directly to market, offsetting the loss of revenue due to the reduction • changes in income due to in olein and stearin production. changes in output and efficiency (see, e.g., Figure 5) or • changes in operating costs (see, TABLE 2: PROJECTED REVENUE CHANGES FOR PACKAGES, PAKISTAN, e.g., Table 2, purple text). DUE TO CHANGES IN INCOME AND FUEL COSTS RELATED TO POWER PRODUCTION Some risks, such as temporary Impact Temperature increase by 2020s shutdowns of facilities due to 1.1°C 1.26°C 1.88°C extreme climatic events (e.g., Power output of steam turbine (current 17.78 MW 17.77 MW 17.73 MW major floods), clearly also have level is 17.85 MW) the potential to affect financial Reduction in annual income due to –$57,000 –$65,000 –$98,000 performance. However, owing to reduced power output, based on a lack of knowledge about the assumed $0.1/kWhr and 340 operating present-day and future probabilities days/year of such events, it was not possible to quantify them in financial terms. Offset by reduction in annual operating $25,300 $28,000 $45,000 Filling this gap is a research objective cost of natural gas (boiler fuel) that is recognized by governments Net change in annual revenue –$31,700 –$37,000 –$53,000 and scientists, and there are efforts Total undiscounted change in revenue –$253,600 –$296,000 –$424,000 underway to address it through from present day to 2017 various fora, such as the World Total discounted change in revenue –$157,474 –$183,803 –$263,285 Meteorological Organization and from present day to 2017 (12% the IPCC. Still, due to the rarity discount rate) of extreme climatic events and the complexities in understanding Note: 2017 is the final year in Package’s current financial model. Rising temperatures will what drives changes in their produce savings for Packages in the cost of its natural gas usage by increasing boiler efficiency. incidence, this will continue to be an area of uncertainty in climate risk assessments. Strategies for robust decision making on climate resilience need to be developed despite the limitations of this imperfect knowledge. 6 Climate Risk and Business | Practical Methods for Assessing Risk
ADAPTATION ACTIONS Instead, based on the levels of confidence in the various risk The pilot studies made less progress analyses, different risk management in analyzing the costs and benefits options were recommended for the of adaptation actions to manage clients to consider. In essence, where the risks identified. This is because there was high confidence in the the appropriate adaptation actions risk analyses, it was recommended and associated costs for a given that clients investigate the costs client are highly specific to the and benefits of adaptation assets or processes being adapted, actions. Where there was lower and decisions on when it would be confidence associated with the risk appropriate to undertake action assessments, a more exploratory may depend on current and future approach was suggested, including regulatory positions, age, condition, research, monitoring, field trials and and operating regimes of existing surveillance. assets, as well as the client’s investment plans. For some risk areas (such as malaria incidence affecting workers at GOPDC), the analysis showed that the effects of present-day climate The appropriate variability on income were already adaptation actions important. In these cases, it was recommended that the client should and associated investigate actions that could costs for a given be taken now to better manage climate-related impacts. client are highly specific to the Overall, the pilot studies have provided information on climate risks assets or processes and recommendations on adaptation actions which the clients can being adapted. incorporate into their mid- and long- term financial and operational plans. Climate Risk and Business | Practical Methods for Assessing Risk 7
Lessons learned, uncertainties, gaps and barriers In developing the pilot studies, many issues were encountered that The Khimti 1 and GOPDC visits lasted for one and two weeks, The clients are common to all climate risk and respectively. Each involved a also found the adaptation assessments and which will workshop and in-depth meetings be familiar to those who have been with client staff responsible for interaction with involved in such studies. However, managing financial, technical/ the study teams there are also some aspects that operational, environmental, and are unique to undertaking these social performance, as well as site to be a fruitful assessments with the private sector. visits. These were vital in providing insights into existing climatic experience, which VALUE OF VISIT TO CLIENT vulnerabilities, sensitivities, and helped to build SITE AND STAKEHOLDER ENGAGEMENT critical climate-related thresholds. The clients were also able to provide their appreciation data and reports which were used to of climate risk and The three pilot studies were develop the climate risk assessments. undertaken in sequence; Khimti 1 its relevance to was the first, followed by Packages and then GOPDC. Each study Meetings with external parties as part of the visits, including national their objectives. gained from the experiences of and local government officials, earlier studies, and the GOPDC research institutes, universities, study was able to achieve the community groups and public- CLIMATE DATA most. Owing to security concerns service providers, were also very in Pakistan, the visit to Packages informative. These provided data The climate data constraints could not be undertaken, and and reports on the pilot study encountered in the pilot studies interaction between the client sectors and their vulnerability to are common to all climate risk and the consultants was restricted current climate conditions, as well as assessments. They relate to to telephone conferences and information on in-country research uncertainties in data quality for e-mail exchanges. It became on climate change and its impacts. both observed and future climate very apparent that this made a conditions. considerable difference to the The clients also noted that they depth of analysis that could be benefited from the experience of achieved for Packages compared being involved in the pilot studies and Observed conditions to Khimti 1 and GOPDC. In many that it led to some changes in their cases, the Packages pilot study activities. For instance, for GOPDC Ideally, robust climate risk was therefore based on generic the work was a stimulus for them to assessments should be undertaken published information in the begin to monitor climatically sensitive by drawing on long-term (at least scientific and engineering literature issues, to correlate some aspects 30-year), high-quality records of all rather than on client-specific of performance against climatic relevant climate statistics, measured information. factors, and to engage with other at the project site. In practice, such stakeholders who held information data sets are seldom available, and about risks. it is often necessary to utilize data collected at meteorological stations Climate Risk and Business | Practical Methods for Assessing Risk 9
operated by national meteorological Figure 6: Average Monthly Maximum and Minimum Air Temperatures (°C) for agencies, which may not be Jiri and Janakpur Meteorological Stations, 1971–2000 representative of the project site. 40 This is exemplified in the Khimti 35 1 pilot study. Observed monthly Temperature (deg C) 30 temperature data for the two closest 25 meteorological stations to the project site, Jiri and Janakpur, are shown in 20 Figure 6. Jiri and Janakpur are both 15 approximately 20 km (north and 10 south, respectively) from Khimti 1 5 power station, at altitudes of about 0 2,000 m and 78 m. The Khimti 1 -5 power station is at an altitude of Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec approximately 700 m. As can be seen Month in Figure 6, the differences in altitude Average monthly max Average monthly min result in considerable differences temps Jiri (1971-2000) temps Jiri (1971-2000) in the climate data recorded at Average monthly max Average monthly min each meteorological station. The temps Janakpur (1990-2000) temps Janakpur (1990-2000) catchment area for the Khimti Khola River (on which the hydropower Furthermore, in order to undertake a “The understanding of scheme relies) is in very mountainous climate risk assessment it is important anthropogenic warming and terrain, over which there is great to understand the natural variability in cooling influences on climate variation in climate conditions. To climate conditions onto which climate has improved since the TAR undertake a climate risk assessment change effects will be superimposed. [Third Assessment Report], of future changes in river flow, For instance, where climate change leading to very high confidence it is first necessary to develop a leads to decreases in precipitation, that the global average net model that relates observed climatic these decreases would be exacerbated effect of human activities since conditions and observed river flows. in a dry year in the future, leading to 1750 has been one of warming Building such a model in an area potentially severe impacts, whereas (IPCC 2007b, “Technical where the baseline climate is highly they might be counteracted in a Summary,” sec. 2.5).” spatially variable over a small area is wetter year. In general, precipitation is challenging. highly variable from year to year (see, “Warming of the climate system e.g., the data from Lahore, Pakistan, is unequivocal, as is now evident Ideally, robust in Figure 7), whereas variability in temperature tends to be lower. In from observations of increases in global average air and ocean climate risk practice, however, given constraints temperatures, widespread assessments should on the resources available for the pilot studies, the climate risk assessments melting of snow and ice, and rising global average sea level be undertaken were generally performed by (IPCC 2007a, sec. 1.1).” superimposing future climate change by drawing on scenarios onto the average baseline For the next two decades, a long-term (at least climate conditions. warming of about 0.2oC per decade is projected for a range 30-year), high- Scenarios of future climate of SRES4 emission scenarios. quality records of change “Anthropogenic warming and all relevant climate The IPCC Fourth Assessment Report sea level rise would continue makes it clear that man-made for centuries due to the time statistics, measured climate change has been underway scales associated with climate at the project for decades and will continue for decades to come: processes and feedbacks, even if greenhouse gas concentrations site. In practice, were to be stabilised (IPCC such data sets are 2007a, sec. 3).” seldom available. 4. Special Report on Emissions Scenarios; IPCC 2007a, “Summary for Policymakers” 10 Climate Risk and Business | Practical Methods for Assessing Risk
Figure 7: Observed Monthly Precipitation at Lahore (top) and Time-Series of How global climate change will Winter (Dec/Jan/Feb/Mar) Precipitation at Lahore (bottom), 1861–2008 translate at the local level. To some extent, this can be analyzed by 300 This chart shows average monthly precipitation over this 150-year record, with 10% and 90% 90%risks based on a wide investigating precipitation amounts shown using error bars. range of global (coarse-scale) and regional10% 250 Natural variability in rainfall is very high in this (finer-scale) climate models region, particularly during the rainy season. 200 For 10 months of the year the 10th percentile and/or using statistical downscaling 2005 mm/month precipitation amount is zero. techniques. At present, there are 150 many global 2004 climate models to draw from, but far fewer regional models. 100 2003 in some parts of the Furthermore, world the global climate models 2002 50 are not good at simulating baseline climate 2001 conditions, nor are they 0 in agreement about projections Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec of future2000 changes, particularly in Month relation to precipitation (see Figure Average (50%) precipitation by month (in mm). Bars show 10% and 90% 2 above1999 for an example). These precipitation amounts over the 1901-1970 period kinds of model uncertainties are not 1998 untypical, particularly in areas where Data from this long-term precipitation record show no 250 discernible trend in winter precipitation. There is, however, a the topography 1997 is complex (highly slight upward trend in precipitation during the summer and mountainous regions or coastal areas) rainy season for Lahore City. 1996 with monsoon or 200 and in regions tropical climates. According to the 1995 IPCC’s Fourth Assessment Report: mm/month 150 1994 “There are substantial inter-model 100 differences in representing monsoon processes, and a lack of clarity over changes in ENSO [El Niño Southern 50 Oscillation] further contributes to uncertainty about future regional 0 monsoon and tropical cyclone 1861 1865 1869 1873 1877 1881 1885 1889 1893 1897 1901 1905 1909 1913 1917 1921 1925 1929 1933 1937 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 behaviour. Consequently, quantitative Year estimates of projected precipitation Total winter (DJFM) precipitation (mm/month) change are difficult to obtain” (IPCC Source: KNMI (Royal Netherlands Meteorological Institute), available online at http://climexp.knmi.nl 2007b, sec. 11.4). There is high confidence that the Nevertheless, in any given location, Coarse spatial resolution of climate climate in the coming decades there are uncertainties about models. Because of the coarse spatial will change rapidly and will not precisely what future climate resolution (typically 2.5o x 2.5o) of be like the relative stable climate conditions will be experienced, and the grid used in GCMs, they provide of the recent past. In particular, approaches have been developed “smoothed” estimates of future projected temperature changes by climate scientists to characterize changes. However, if the topography are well characterized, and these, as have approaches to robust within an individual 2.5o x 2.5o grid agreement between the different decision making in the face of these square is highly variable (as is the case climate models is generally good. uncertainties. The key dimensions for the location of Khimti 1), then the Additionally, changes in future of uncertainty are outlined below, local changes may be higher or lower emissions of greenhouse and other along with discussion of how than the smoothed estimates. The gases that affect the climate can each dimension could be better recommended approaches to tackling be understood with relatively high understood. this are to generate downscaled confidence on the timescales of projections using regional climate relevance to the private sector by models or statistical downscaling tools, using a range of emissions scenarios driven by multiple GCMs. However, in risk assessments. in areas where the global climate models are not in agreement, there Climate Risk and Business | Practical Methods for Assessing Risk 11
is little to be gained by undertaking Figure 8: Seasonal Yield Cycles in Different Countries Compared to Seasonal downscaling. This was deemed to be Yields at GOPDC, Kwae Plantations, for 1988–97 Years of Harvest the case for all three pilot studies. Percentage of annual total yield in each month at Kwae (averaged across 1988 - 1997 YOH) Changes in climatic extremes and 20% timescales of projections. To evaluate 18% the full range of risks posed by 16% climate change to an investment, it Percent of annual total in each month is important to consider changes in 14% both long-term average and extreme 12% climatic conditions. However, in 10% general, there is very little information 8% available on changes in extremes (e.g., 1-in-100-year storm-surge 6% height, maximum hourly rainfall 4% intensity), and what is available is 2% often only for the end of the 21st 0% century. There are various reasons for JAN FEB MAR APR MAY JUN JULY AUG SEPT OCT NOV DEC Month this information gap, including a lack of data on observed extreme events Average tonnes % (by nature of their rarity), which Source: Adapted from Corley and Tinker 2003 constrains the ability of climatologists to understand how they may change help to develop understanding of the regions with more uniform climates, in the future, as well as limitations in relationships between climatic factors such as Malaysia. This annual cycling the amount of climate model data and their impacts on different systems is reported to have a large influence that are stored by meteorological and can build generic system models. on yield even in regions that lack offices around the world. It is clear Second, provided that such models marked seasonal variations in climatic that additional investment in research are made accessible, private-sector factors, and it also persists in irrigated by public-sector organizations could stakeholders can adapt them to better conditions. Figure 8 compares the be usefully targeted to addressing represent the specific conditions for seasonal yield cycles in four oil- this important gap. their investments. palm-producing countries to that at GOPDC, demonstrating that in ASSESSMENTS OF RISK TO To appreciate this complexity, consider addition to seasonal variability within INVESTMENT PERFORMANCE the analyses of the relationships each country, there is also significant between oil palm yield at GOPDC variation in the yield cycle across As noted, evaluating climate change and the climatic and nonclimatic countries. This means that in order to risks to the performance of the pilot factors which influence it. In general, fully understand the range of factors study projects required understanding oil palm yield is affected by a range affecting oil palm yield in any given the relationships between of nonclimatic factors, including location, a specific model must be climatic factors and the aspects of palm age, soil type, seed type and developed for that country. performance being considered. In management practices. Yield is also most cases for the pilot studies, affected by the abundance of oil palm Complexity is further compounded this required knowledge which pollinators and outbreaks of pests by the numerous stages in the was not already available. Where and diseases, both of which can be development of oil palm fruits (from possible, within the resource and influenced by climate. Disentangling which crude palm oil is extracted), each data constraints of the pilot studies, these influences is a major research of which is differently vulnerable to statistical models were constructed undertaking, and it appears that no climatic conditions. Table 3 summarizes to represent these relationships. model currently exists which captures the stages which determine the final However, the development of all these factors. inflorescence and bunch characteristics system models is often fraught with of oil palm, as reported in different complexity, and uncertainties about Furthermore, large seasonal variations studies. It is clear that there is much system response to climatic and in oil palm yield are expected in variation in the lengths of oil palm nonclimatic factors constrain the regions such as West Africa, where development stages reported in the robustness of these assessments. severe dry periods are common. literature, so attempts to correlate There are two stakeholder groups who However, researchers have reported observed climate data to oil palm yields can help to address these constraints. that similar, though less extreme, are difficult to undertake. First, publicly funded research can seasonal variations are also evident in 12 Climate Risk and Business | Practical Methods for Assessing Risk
ANALYSIS AND TABLE 3: DEVELOPMENT STAGES OF OIL PALM FRUIT COMPONENTS, RECOMMENDATIONS ON ACCORDING TO VARIOUS STUDIES ADAPTATION ACTIONS Approximate months before harvest As is clear from the preceding discussion, undertaking robust risk assessments for the pilot studies Breure and Oboh and Corley and Tinker was a complex process, and Menendez Fakorede 2003, various future improvements will require Development stage 1990, Malaysia 1990, Nigeria studies/locations investment in research at all steps Inflorescence initiation 38 — 44 (Ivory Coast). Corley in the risk assessment chain. Until also found a range these uncertainties are better of 26–37 months for resolved, it can be difficult to justify different clones. expenditure on physical adaptation Sex determination 18 30 21–29 actions to clients. For instance, Inflorescence abortion 11 11 9 –10 design standards for assets aimed at Flowers per spikelet 19 — 12–15 preventing pollution from facilities are often based on extreme events Spikelet number 24 17–24 Within 9 months (e.g., site drainage systems and mine Frame weight (stalk 7–9 — No clear response tailings dams are designed based plus spikelet) on anticipated extreme precipitation Anthesis and fruit set 6 — 5 amounts), but until there is better understanding of how the intensity or frequency of such events will For some of the systems evaluated change in the future, it would not in the pilot studies, the study teams Undertaking robust be sensible to propose that a client upgrade existing infrastructure. There were able to work with the client to develop a sound understanding of risk assessments are, however, often opportunities the risks, which provided a good basis for the pilot studies to build in resilience against future climate changes at lower cost when for decision making on adaptation. The strongest examples of this relate was a complex designing new facilities. to risks associated with increases in process, and future average temperatures, which affect power production at Packages and improvements will refinery output at GOPDC (as shown in Table 2 and Figure 5 above). require investment in research at all steps in the risk assessment chain. Climate Risk and Business | Practical Methods for Assessing Risk 13
General results and conclusions MOST SIGNIFICANT RISKS • Systems are highly sensitive to Water resources are a key AND UNCERTAINTIES changes in climatic factors. concern For instance, GOPDC’s refinery In general, on the timescales of and fractionation plants are A feature of all the pilot studies (in relevance to private sector investments, sensitive to small increases in common with the majority of private changes in monthly, seasonal, or cooling water temperature, sector investments) is their reliance annual average climate conditions which reduce the effectiveness on water resources. are small (on the order of 1oC–2oC of vacuum-producing systems temperature increases and +/– 5 to 10 and extend crystallization times. Khimti 1 hydropower scheme river percent changes in precipitation). As a Hence, production rates of flows. For Khimti 1, clearly, the result, the pilot study analyses indicate olein and stearin are reduced. output of the hydropower scheme that the most significant risks on these Variations in temperature from is dependent on flows in the Khimti timescales are where: day to night already have Khola River. Owing to uncertainties significant impacts on crude about future changes in rainfall and • Existing climatic vulnerabilities palm oil throughput at the about modeling the impacts of these may be exacerbated and critical refinery when cooling water changes on river flows, it was not thresholds crossed. temperatures exceed the design possible to determine with confidence For instance, for the Khimti 1 threshold of 32oC. Throughput how climate change will affect flows. hydropower scheme, HPL is can be 20 percent lower in the The variations projected for the under an obligation to maintain daytime, when it is hotter. In 2020s, using four climate models and dry-weather flows in the Khimti future, the vacuum systems three emissions scenarios, are shown Khola River above certain levels are expected to become less in Figure 9. From the point of view of downstream of the Khimti 1 effective as temperatures rise power production, changes in flows intake. If climate change were (see Figure 5 earlier), and in the dry season are the most critical, to lead to greater incidence of crystallization times will extend, because monsoon flows exceed low flows, then the requirement leading to a reduction in olein Khimti 1 capacity by a large margin. to meet this critical threshold and stearin output. An extra In the dry months, the modeling could affect the power produced cooling tower has recently indicates that flows could change by at Khimti 1. In actual fact, the been installed at GOPDC to about +/– 10 percent by the 2020s. modeling undertaken in the serve the refinery. This will It should be noted that the model Khimti 1 pilot study did not help to reduce the impact of outputs become more consistent over indicate that the risk of flows rising temperatures on refinery time; by the 2050s there is a clearer falling below this threshold would output, though it will not indication of an increase in dry-season be exacerbated in the future. completely eliminate it. flows. Climate Risk and Business | Practical Methods for Assessing Risk 15
A feature of all the Figure 9: Monthly Projections of Stream Flow at Rasnalu Flow Gauging Station (close to Khimti 1 intake), under Four GCMs for the 2020s, Using Empirical pilot studies (in River Flow Models common with the majority of private 80 15% Change in monthly average streamflow (%) NB Monthly average streamflow (m3/s) 70 10% sector investments) 60 5% is their reliance on 50 0% water resources. 40 30 -5% -10% 20 Groundwater at Packages and 10 -15% GOPDC. Both Packages and GOPDC 0 -20% rely on groundwater for their Magh (Jan-Feb) Falgun (Feb- Mar) Chairta (Mar- Apr) Baishak (Apr- May) Jestha (May-Jun) Ashad (Jun -Jul) Srawan- (Jul-Aug) Bhadra- (Aug- Sep) Ashoj- (Sep-Oct) Kartik (Oct-Nov) Marg- (Nov Dec) Poush (Dec-Jan) industrial operations (pulp and paper production at Packages, and production of crude palm oil and Ave Observed streamflow GFDL-CM2.0, 2005 - SRES A2 (10-yr mean) (% change) olein and stearin at GOPDC’s mill GFDL-CM2.0, 2005 - SRES A2 (10-yr mean) and refinery). For Packages, growth CGCM3.1(T63), 2005 - SRES B1 (% change) CGCM3.1(T63),2005 - SRES B1 of wheat straw, which is one of the CSIRO-Mk3.5 - SRES A2 CSIRO-Mk3.5 - SRES A2 (% change) inputs to its pulp and paper mills, GISS-ER, 2004 - SRES A1B GISS-ER, 2004 - SRES A1B (% change) also relies on groundwater irrigation, Note: Projections are for Nepalese months, as shown on the x-axis. and GOPDC’s oil palm nursery is irrigated using groundwater. Figure 10: Factors Affecting the Way Human Activities Impact Freshwater Resources These dependencies mean that any changes in the availability of Water Greenhouse Climate groundwater resources could pose quantity and gas emissions change quantity significant risks to the investments. Yet the pilot studies indicate that the vulnerabilities of these resources to climatic and nonclimatic factors Population, Water lifestyle, are not currently well understood. economy, Land use resources The complex links between climate management technology change and other factors influencing water supply and demand are highlighted in Figure 10. Water demand Groundwater is something of a hidden resource, by virtue of its not Source: Modified from Oki 2005 being visible. While both Packages and GOPDC monitor groundwater levels in boreholes, neither company the aquifers they are using to better emissions scenarios. The results of has undertaken a wider assessment understand the factors that influence this risk assessment are presented of the climatic and nonclimatic their recharge. Based on such in Figure 11. As shown in the factors influencing the aquifers that surveys, models of the aquifers could figure, the majority of the model they are using. Improved long-term be constructed to provide the basis runs indicate a future increase in monitoring could include researching for future resource management. groundwater recharge. Using the the relationship between borehole Amritsar groundwater model, 77 water levels and climatic variables, To evaluate risks from climate percent of the model results show considering time delays between change for groundwater recharge an increase for the 2020s, and 67 climatic events and their impacts on at Packages, the pilot study used percent do for the 2040s. Using groundwater levels. The companies two groundwater models, driven the CATCHMOD model, about 88 could also consider commissioning by climate change scenarios from percent of the model projections surveys of the catchment areas for multiple GCMs, under three show an increase in both time 16 Climate Risk and Business | Practical Methods for Assessing Risk
periods. This is because nearly 75 Figure 11: Frequency of Projected Groundwater Recharge, as Calculated Using percent of precipitation in the region Two Groundwater Modeling Methods falls during the monsoon season, and this is when most of the natural 10 Model result frequency recharge occurs, through water 8 being absorbed into the soil rather than evaporating. Most of the 6 climate models project an increase in 4 monsoon-season precipitation. 2 While this kind of assessment is 0 very useful for characterizing the -40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 more uncertainties in future recharge, Percent change in recharge (Amritsar) for the 2020s it is important to note that to understand fully future risks, changes SRES A1B (13 models) SRES A2 (13 models) SRES B2 (13 models) in groundwater demand by Packages 6 Model result frequency and other users (e.g., for crop 5 irrigation) related to climate and socioeconomic changes need to be 4 evaluated. 3 2 Low-probability / high- 1 consequence events 0 -40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 more There are significant unknowns Percent change in recharge (CATCHMOD) for the 2020s regarding future changes in the occurrence of low-probability SRES A1B (13 models) SRES A2 (13 models) SRES B2 (13 models) (extreme) / high-consequence events. These could represent the highest 10 Model result frequency risks to the pilot study clients, but it 8 was not possible to evaluate their 6 significance. The notable examples of these from the Khimti 1 and GOPDC 4 pilot studies are highlighted in Table 4. 2 Further research and monitoring to 0 -40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 more help evaluate the significance of these Percent change in recharge (Amritsar) for the 2040s risks, though challenging, would be very worthwhile, because when these SRES A1B (13 models) SRES A2 (13 models) SRES B2 (13 models) unlikely events occur, they can have very large financial consequences. 10 Model result frequency For GOPDC, a single outbreak of the leaf miner (a pest which causes 8 widespread defoliation of oil palms) 6 could lead to revenues not earned of $1.8 million. An outbreak occurred 4 at GOPDC’s plantation in 1987, 2 and 13,000 tons of oil palm fresh fruit bunches (from which the palm 0 -40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 more oil is extracted) were lost. The leaf Percent change in recharge (CATCHMOD) for the 2040s miner is known to be sensitive to temperature, rainfall and carbon SRES A1B (13 models) SRES A2 (13 models) SRES B2 (13 models) dioxide concentrations, but there is little information on these sensitivities, Note: Projections for the 2020s are shown in the top two figures and for the 2040s in the and the impacts of climate change on bottom two figures. leaf miner incidence have not been researched in any depth. Climate Risk and Business | Practical Methods for Assessing Risk 17
TEMPERATURE-RELATED TABLE 4: LOW-PROBABILITY / HIGH-CONSEQUENCE EVENTS FOR KHIMTI 1 IMPACTS ON INDUSTRIAL AND GOPDC PROCESSES CAN BE WELL Khimti 1 GOPDC CHARACTERIZED Extreme flood event on Khimti Khola and Oil palm pest or disease outbreak As noted above, climate models are Tami Koshi rivers Loss of natural oil palm pollinator generally in good agreement about Landslide blocking Khimti Khola River and future increases in temperature. access road to site The impacts of rising temperatures Glacial lake outburst flood on industrial processes at GOPDC and Packages were evaluated with In the case of GOPDC, one financial Packages generates power on-site and a higher degree of confidence impact associated with rising sells surplus power to the grid. The than other issues, because the temperatures is the reduction in condensing steam turbine efficiency relationships between temperature olein and stearin production (see at the power plant is slightly reduced and process performance are well Figure 5 above). The relationship by temperature increases, and again, understood. In general, industrial between temperature and the relationship is well understood (see equipment that generates heat (e.g., production rates was recorded on- Figure 12). This information allows a turbines, compressors, motors) is site by GOPDC’s refinery production highly confident projection of a small likely to see some efficiency losses manager and was established with a reduction in Packages’ future income due to the higher temperatures high degree of confidence. from power sales (as shown above in expected under climate change. Table 2). Further research Figure 12: Power Output of Packages’ 41 MW Siemens Condensing Steam and monitoring Turbine with Double Extraction vs. Cooling Water Temperature to help evaluate 37 Efficiency=75% the significance of Power factor=0.85 NB these risks, though 36 challenging, would Power output, MW 35 be very worthwhile, because when 34 these unlikely events occur, they 33 Baseline cooling water temperature can have very 32 large financial 31.8 32.0 32.2 32.4 32.6 32.8 33.0 33.2 33.4 33.6 33.8 34.0 consequences. Cooling water temperature, ºC 18 Climate Risk and Business | Practical Methods for Assessing Risk
FROM UNCERTAINTY Figure 13: Quality of Knowledge of Climate Change Risks to GOPDC TO RISK Risk is a function of two dimensions: Good the probability of a hazard and the Ambiguity about the risk e.g. Good knowledge of the risk e.g. magnitude of its consequence. The quality of knowledge of each of • uncertain or unknown impacts • unchanging climate these dimensions is a measure of • no impact models • good historical data how well a risk is understood (see • uncertain how to value • good impact models consequences • short term prediction Figure 13). • lack of concern As outlined earlier, information Knowledge of probability on future changes in extreme climatic events is scarce, and there is uncertainty in all the pilot studies locations about whether seasonal average precipitation will decrease or increase in the future—the quality of Ignorance about the risk e.g. Impacts well defined but knowledge about the probability of probability uncertain e.g. • rapidly changing climate these changing hazards is poor. • new/unknown processes • poor knowledge of likelihood • complex dependencies, such as of damage For some of the issues explored in the non-linearity • good impact/process models pilot studies, there was little evidence • longer term forecast • well defined impacts if event • insufficient data occurs about how the system would be • climate surprises • longer term assessment affected by changes in climate. For instance, literature is lacking on how Poor the presence of GOPDC’s natural oil palm pollinator and the leaf miner pest are correlated with climatic Poor Good Knowledge of consequence factors. Yet, total loss of the pollinator would have an estimated financial Source: Willows and Connell 2003 impact for GOPDC of more than $1 million per annum. A major leaf miner outbreak could lead to revenues On the other hand, temperature- The potentially significant financial not earned of $1.8 million per annum. related risks to industrial operations at consequences outlined above provide Lack of availability of groundwater at GOPDC could be quantified with some a strong signal on the areas where GOPDC would lead to the mill and precision, because both the probability future efforts to reduce uncertainties refinery being shut down, but the of the hazard and the magnitude of its should be focused, so that risks can sensitivity of this resource to climate consequence were known with a good be better understood and appropriate change is unknown. degree of confidence. adaptation actions undertaken. Climate Risk and Business | Practical Methods for Assessing Risk 19
Annex 1: A risk-based approach Figure 14 illustrates the risk- Figure 14: Climate Risk Assessment and Management Framework Used in the uncertainty decision-making Pilot Studies framework which forms the basis How can we ensure that the of the pilot study methodology. The investment continues to deliver framework was developed by the successfully on its objectives in the U.K. Climate Impacts Programme face of climate change? (UKCIP) and the U.K. Environment What are the opportunities from What is the investment climate change for the investment? What are the Agency (Willows and Connell 2003). aiming to achieve? success criteria for It sets out eight stages, of which the assessing risks and first six were followed in the studies. 1 Identify problem and objectives adaptation The key questions addressed at each options? (Consider critical climate- stage of the process are shown on 2 Establish decision- related thresholds making criteria, the figure. 8 Monitor receptors, ex posure units and and sensitivities, risk assessment endpoint s legislation, cost, Stages 5 and 6 were explored 3 Assess ri sk risk attitude etc.) in less depth than stages 1–4, What are the because these later stages required climate- knowledge of the costs and benefits 7 Implement related risks decision of adaptation options, which was to success (as 5 Appraise 4 Identify defined in not readily available. options options Stage 2) using best available No No climate data? In practical terms, the pilot studies Yes involved: Pr oblem defined Yes Criteria met ? correctly? How well do the What are the • a visit to the project site (except adaptation options adaptation options 6 Make decisio n perform against the that should be in the case of Packages), considered to success criteria (as • meetings with the IFC client, What are the ‘best’ defined in Stage 2)? address the risks to discuss climatic sensitivities adaptation options for identified in Stage 3? the investment? and vulnerabilities, obtain data, reports, and so forth, Source: Willows and Connell 2003 • meetings with in-country sector experts and climate change experts from the public The specific risk areas considered sector, research institutions, varied from study to study (see Table universities, and community 1 above), but in general terms, groups, all the studies aimed to provide • literature reviews and qualitative a holistic approach by analyzing analysis of impacts, and risks to the technical/operational, • quantitative assessments of environmental, social and financial impacts, where possible. performance of the investments. Climate Risk and Business | Practical Methods for Assessing Risk 21
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