The adaptation tipping point: are UK businesses climate-proof? - Sustainability West Midlands
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
The adaptation tipping point:
are UK businesses climate-proof?
“Most people who have
taken climate risks into account have
only considered half the picture…”
acclimatise
John Firth
+44 1636 812868
j.firth@acclimatise.uk.com
UK Climate Impacts Programme
Chris West
+44 1865 285717
enquiries@ukcip.org.uk
Carbon Disclosure Project (CDP)
Paul Dickinson
+44 7958 772864
paul@cdproject.net
Acclimatise and UKCIP gratefully acknowledge the advice and contributions of
Malcolm Dowden (Charles Russell, LLP). We would also like to thank Yara
Chakhtoura, who undertook the analysis of FTSE 350 responses to the CDP4
request for information.
Design by Stephanie Ferguson, UKCIP.
This report should be referenced as:
Firth, J, and Colley, M (2006) The Adaptation Tipping Point: Are UK Businesses
Climate Proof? Acclimatise and UKCIP, Oxford.
ISBN 0-9544830-9-X
Further copies of this report can be downloaded from www.acclimatise.uk.com
and www.ukcip.org.uk
Hard copies of the report are available from:
UK Climate Impacts Programme
Oxford University Centre for the Environment
Dyson Perrins Building
South Parks Road
Oxford OX1 3QY
Tel: +44 (0)1865 285717
Fax: +44 (0)1865 285710
Email: enquiries@ukcip.org.uk
“Most people who have
taken climate risks into
account have only
considered half the picture.”
Chris West, Director, UKCIP
Foreword
Foreword
T h e ada ptati on ‘ ti ppin g -po i nt ’:
ar e UK bus ines ses cli mate- pro o f?
Our climate is changing, and we are faced with many years of continuing unavoidable
change. Even if we make a significant reduction in greenhouse gas emissions tomorrow,
the lag in the climate system means that we will need to cope with a changing climate for
the next 40 plus years, due to emissions we have already put into the atmosphere.
Businesses and the financial markets need to grasp the reality we face – that we have to
both reduce our emissions, and adapt to inevitable climate change.
There is no choice between mitigation and adaptation – we have to pursue complementary
actions on both.
The report explores why adaptation is and will become an increasingly important issue for
businesses, investors and the financial markets, in addition to the already urgent
mitigation agenda.
This report provides a concise explanation of the scale of the adaptation agenda and the
implications for business. It establishes a milestone against which future actions will be
measured by investors, employees, customers and communities.
All CEOs, Finance Directors, non-Executive Directors and all those engaged in providing
business, legal and financial advice will greatly benefit by reading this report and reflecting
on the consequences for their companies and clients if they fail to take action – now.
Chris West John Firth
Director, Managing Director,
UK Climate Impacts Programme acclimatise
1
Executive summary
Ex e cu tiv e su mm ary
Our climate is changing. The implications for businesses, and to • This contrasts markedly with other
their investors, customers and workforce, companies in the same sectors
We are already faced with many years of
through failure to assess and manage appearing not to recognise that they face
continuing unavoidable change.
climate risks are significant. any climate risks.
Even if we make a significant reduction in
• Value, return and growth will reach a • Although the potential direct impacts of
greenhouse gas emissions tomorrow, we
tipping-point when an increasing extreme events are recognised, there is
will need to cope with a changing climate
awareness and understanding of the less appreciation of the impacts, both
for the next 40 plus years, due to
realities of climate change challenges direct and indirect, arising from changes
emissions we have already put into the
previous expectations. in longer-term average conditions and
atmosphere. The future climate is already
seasonal variation in temperature,
set over this time period and the • Decisions taken by directors and
precipitation etc.
consequences can not be ignored. professional advisers may be open to
legal challenge. In addition to analysing the adaptation
Businesses and the financial markets need
results from the CDP4 survey, this report
to grasp the reality we face – that we have • The tipping points on value, return and
also provides a primer for directors,
to both reduce our emissions and adapt to growth are likely to trigger credit rating
investors, fund managers and their
inevitable climate change. There is no revisions and increases in the costs of
professional advisers on the adaptation
choice between mitigation and adaptation capital.
agenda and the need for action.
– we have to pursue complementary
• Customer expectations, preferences and
actions on both – now. Businesses can respond to build resilience
needs will change as the impacts of
and climate-proof their interests.
climate change become apparent.
Uncertainty about the future is not a
• Governments are likely to resort to reason for inaction.
prescriptive regulation if businesses do
There is sufficient information to enable the
not respond with adaptive action.
impacts of a changing climate over the
This report has analysed the Carbon next 40 years to be embedded in decision-
Disclosure Project responses of making at strategic and project levels.
businesses in the UK FTSE 350 to explore Adaptive management is feasible.
their understanding of the need for
Changing markets, customer needs and
adaptation. These are the key findings.
investor expectations will present
• Despite an increasing realisation of significant opportunities for those
climate risks, this is not reflected in the companies that take action to climate-
risk management strategies of the proof their businesses.
majority of the FTSE 350. Only 10% of
Taking adaptive action early may be cost-
the FTSE 100 reported that they
effective when compared with the costs
considered the impacts of climate
associated with remedial action at a later
change pose a high risk to their business
date. When analysing potential action,
operations.
companies should consider their fiduciary
• Adaptation is not as well understood as responsibilities.
mitigation.
Businesses should review their climate risk
• The number of good responses, with a management strategies and check that
rich description of climate risks, is low. they are responding to both the mitigation
and the adaptation agendas. Action is
• Within some sectors, there are a small
required on both – now.
number of companies that have
demonstrated an understanding of
climate risks. These companies are
setting the pace and will become the
benchmarks.
2
Table of contents
T able of co nte n ts
Introduction 4 Sector summaries 11 Appendices 25
Aerospace and defence 12 Appendix 1: References 25
Why adaptation matters 5
to business Automobiles and machinery 12 Appendix 2: About the Carbon 26
Disclosure Project
Banks 13
A changing climate — what is the 6
Appendix 3: CDP4 questionnaire 27
science telling us? Chemicals 13
Appendix 4: CDP4 signatories 28
Construction and building 14
Significant business risks 7
materials Appendix 5: Companies’ 30
Value, return and growth at the 7 responses to the CDP4
Food-related industry 14
tipping point questionnaire
General retailers 15
Litigation 8
Hotel and leisure 16
Brand and reputation 9
Insurance 16
Credit rating 10
Media and entertainment 17
Growing government action on 10
adaptation Mining, steel and other materials 17
Oil, gas and electricity 18
Pharmaceuticals and 19
biotechnology
Real estate 19
Software and computer 20
services
Specialty and other finance 20
Support services 21
Telecommunications services 21
Tobacco and beverages 22
Transport 22
Utilities 23
What can business do? 24
3
Introduction
I nt ro du ct ion
"We are not talking any more about This report focuses on the climate risks The report explores why adaptation is and
what climate models say might to business from inevitable climate will become an increasingly important
change. issue for businesses, investors and the
happen in the future. We are
financial markets. Exposure areas are
experiencing dangerous human The CDP4 questionnaire included a very
described and the key risks including
specific question (number 3) which,
disruption of the global climate and litigation, brand and reputation, credit
together with responses to other parts of
we are going to experience more." the questionnaire, was designed to assess
rating, regulation and financial
performance are discussed. Summaries
John Holdren, President, American Association the understanding of the UK’s major
are provided for each of the main business
for the Advancement of Science companies of the risks they face from a
sectors.
changing climate – rising temperatures,
rising sea levels, changing rainfall patterns, Finally, the report considers the actions
and extreme events – and the adaptation that can be taken to embed climate risk
measures currently being used to management into decision-making, to
safeguard assets and operations. build resilience and climate-proof
businesses. These actions will allow risks
The question asks:
to be assessed and managed, and
“How are your operations affected by significant market opportunities to be
extreme weather events, changes in identified.
weather patterns, rising temperatures, sea
level rise and other related phenomena
both now and in the future? What actions
are you taking to adapt to these risks, and
what are the associated financial
implications?”
The analysis in this report sits within the
context of growing engagement in recent
years by both businesses and their
advisers in developing an understanding of
climate change, and of calls from investors
for greater disclosure in forward-looking
risk management statements.
4Why adaptation matters to business
W hy a dapta tio n mat ters to bus ines s
We face two climate change challenges, Uncertainty is no excuse for inaction.
not just one.
Uncertainty over climate change is often
Any conceivable emissions reductions cited as justification for delay or inaction.
policies, even if successful, cannot have a Yet there is greater consensus in the
perceptible impact on the climate for some scientific community that man-made
decades – some change is already ‘locked climate change is underway than on
in’ by historic emissions and by inertia in almost any other issue. We have more
the climate system. Global temperatures knowledge and understanding about how
will continue to increase for the next 30-40 our climate is changing than we have
years and sea level will rise for many about demographic change, interest rate
centuries, and we must develop strategies movements, currency fluctuations, or
to address these climatic changes. market variations, and yet every day
businesses are prepared to take decisions
This is not a reason to be complacent
which are affected by these uncertain
about emissions reductions. Adaptation
drivers. While there are still uncertainties
and mitigation are two sides of the same
about the precise impacts of these climatic
coin: we must mitigate emissions in order
changes at individual locations, there is
to limit future climate change, and we must
sufficient information now to enable
adapt in order to deliver a sustainable
businesses to incorporate climate risks
economy in the face of current and future
into decision-making. Uncertainties can be
climate change. These are not alternative
better understood by using climate change
strategies.
scenarios and by identifying thresholds
Climate change is happening – the and sensitivities.
process is already underway. It is having
The sophistication of climate modelling
an effect on business now. There is no
improves year on year. In the UK, the
quick fix as these effects will stay with us
UKCIP02 climate change scenarios
for decades to come. Business has paid
(produced by the Hadley Centre for
increasing attention to the mitigation
Climate Prediction and Research and the
agenda, but has not yet grasped the
Tyndall Centre for Climate Change
significant emerging risks posed directly
Research) currently provide the best
by climate change and variability. Investors
information on how the UK’s climate is
and businesses alike must recognise that
expected to change over coming decades.
the past climate is no longer a sound basis
The next UKCIP climate change
upon which to plan for the future.
information package, due to be released in
2008, will incorporate probabilistic climate
information, and provide a useful tool for
risk-based decision-making.
A business will only flourish if its leaders
are adept at weighing risks and making
robust decisions in the face of uncertainty.
The successful business of the future is
taking climate risks into account today,
and is developing adaptive strategies and
actions to manage the uncertainties.
5A changing climate — what is the science telling us?
A c ha ng in g c li mate –
wh a t is th e sc i e n ce te l li n g u s ?
The rising concentration of carbon The result is climate change. Global In the absence of any human modification
dioxide (CO2) and other greenhouse average temperature has risen by about of climate, temperatures such as those
0.6°C since the beginning of the twentieth seen in Europe in 2003 are estimated to be
gases (GHGs) in the atmosphere is
century, with about 0.4°C of this warming a 1-in-1,000 year event. A simulation using
changing its composition and occurring since the 1970s. The the Hadley Centre’s global climate model
preventing heat from escaping the Intergovernmental Panel on Climate (Figure 1, red line) of summer warming until
earth’s surface. Man-made Change (IPCC) has attributed most of the 2100 over southern Europe shows that by
emissions have already increased observed warming of the last 50 years to the 2040s a 2003-type summer is
human activities. predicted to be about average, and by the
CO2 concentrations by one third 2060s it would typically be the coolest
compared to the start of the The summer of 2003 was an unusually hot
summer of the decade.
one over large parts of Europe, with
industrial era and, by August temperatures 3°C higher than the Under continuing climate change, in the
mid-century, concentrations are long-term average. This caused major UK we can expect:
expected to be twice business disruptions and over 20,000
• increasing climatic variability,
pre-industrial levels. excess deaths directly attributable to the
high temperatures. In the UK there were an • rising temperatures,
estimated 2,000 excess deaths. The Met
• increasing risk of heat waves,
Office estimates with high probability that
the risk of such anomalously high • changing patterns of rainfall, with wetter
European temperatures has already winters and drier summers,
doubled due to the effects of GHG
• increasing risk of drought and flood,
emissions.
• rising sea level,
• increased frequency and severity of sea
8
storm surges,
Observations
• possible increased storm intensity and
Medium−High Emissions frequency.
6
There is also mounting evidence that
tropical cyclones (known as hurricanes in
Temperature change (oC)
the North Atlantic) will become more
4 intense in a warmer world. The devastating
impacts of Hurricanes Katrina and Rita in
2005 demonstrate the kinds of risks that
could become more common.
2
The Gulf Stream will continue to exert a
very important influence on UK climate.
Although its strength may weaken in
0 future, perhaps by as much as 25% by the
end of the century, it is unlikely that this
would lead to a cooling of UK climate since
−2 warming from GHGs will more than offset
1900 1950 2000 2050 2100 any cooling from a weakening of the Gulf
Stream.
Year
Figure 1: European 2003 summer temperatures could be normal by the 2040s; cool by 2060s
[Source: Hadley Centre, 2005]
6Significant business risks
Significant business risks
The impacts of increasing climate • corporate governance interest in “The direct risks arising from climate
variability and a changing climate for director-level risk management is change – rising sea levels, more
business will be far reaching. growing fast,
extreme weather events, alterations
Our current economic structures and • society is becomingly increasingly to rainfall patterns – will affect
social and cultural support systems have risk-averse.
operational costs for many
developed over many years partly in
response to relatively stable climatic
It is clear that few businesses have yet to businesses as they adapt sites and
conditions. The stability to which we have
recognise the new and unfamiliar threats processes to mitigate them.”
arising from a changing climate. Fewer still
become accustomed has allowed a Tom Burke, Visiting professor at Imperial and
have begun to assess the risks and
measure of predictability based on the University Colleges London,
opportunities and to develop risk
analysis of historic climate data. In a Environmental Policy Advisor to Rio Tinto
management processes and actions to
changing world these systems and
meet the challenges. Impacts will be felt by
structures are increasingly exposed to
every business irrespective of their size, "Integrating… climate change into
extreme weather conditions and changing
location, markets, products and services,
long term average climate conditions.
and will affect:
investment analysis is simply
Decisions based on a historic analysis of common sense…
climate data are no longer future-proof. • natural resources and raw materials,
The carbon intensity of profits is an
Awareness of climate risks is growing • supply chains and logistics, approach that needs to be
across all areas of government, business
• fixed asset design and construction, adopted… Climate change is a
and society. There are a number of driving
forces that are increasing the visibility of • asset operation, performance and problem that’s not going to be
climate risks and the market opportunities: maintenance, solved by politicians… Politicians
• the climate is changing, • processes,
have an important role to play; but
the underlying reality is going to
• the frequency and intensity of severe • asset values,
weather events is increasing,
have its effects on the market,
• markets, regardless of public opinion and
• there is increased interest in scientific
information about the climate and a
• products and services, government action.”
consensus within the scientific • workforces. Al Gore
community on climate change,
In this report we discuss some of the risks
• there is also increasing interest from the companies will face to, for example,
legal profession and recent cases of financial performance, litigation, brand and
litigation on climate change in the US, reputation, credit rating and regulation.
Those that fail to respond will be unable to
• governments and others in the public
take advantage of the opportunities.
sector are beginning to create guidance,
legislation and regulation to address
changing climate risks,
Value, return and growth at the
tipping point
• public awareness of climate change is
The perception and realisation by the
very high and is linked to brand value,
financial markets and investors of the risks
• the insurance and investment to value, growth and return are emerging.
communities have awakened to the The insurance industry in particular, is
risks, and are highlighting their concerns, already acutely aware of the potential
impacts and has had first hand experience
• there is increasing importance attached
of the costs arising from events driven by
to business continuity,
climate change.
7Significant business risks
“The potential results of climate
Climate change impacts
Measures of business success
change including changing weather increasing impacts, risk and cost
patterns, rising temperatures and
sea level rises would affect Sky (in
Current value,
the same way as any business) in return and growth
the long term in many ways.” expectations
British Sky Broadcasting, FTSE 100
“We expect climate change not only
to produce extreme capital
Reduced
damaging events but also to value, return
increase uncertainty around and growth
corporate business plans and
2006 Tipping point Significant impacts
potentially reduce asset values.”
Lloyd’s of London
Figure 2: Value, return and growth at the tipping point
“Sudden financial shocks could still
pose a threat to financial stability.
Such shocks can take a variety of Hurricane Katrina has been widely Directors are being challenged by
forms, such as natural disasters recognised as a tipping point for the investors to demonstrate their corporate
(possibly driven by climate insurance industry in the USA. In the UK governance credentials. The spotlight on
change)…” and Europe insurers have been at the financial management and reporting is
forefront of business sector activity in now also focusing on wider strategic risk
Financial Services Authority analysing the potential impacts. The management issues. Over the next few
Association of British Insurers assessed years we will see a greater awareness and
“While some companies have the financial risks of climate change and understanding of the impacts of a
warned of the risk of increasing tropical changing climate. The importance of this
begun to treat climate change as a storm activity and its impact on insurance for businesses is that their adaptation
fundamental strategic issue, many and economies prior to Hurricanes Katrina strategies and actions need to be in place,
more are not disclosing their climate and Rita. Lloyd’s this year warned of the that is businesses must become climate-
risks or plans to address it, creating challenges the industry and its clients proofed, before the tipping point and well
faced and the threats to long-term before the direct effects of a changing
uncertainty for investors and
solvency. Aviva, Allianz and Axa have been climate are felt.
difficulty assessing the true longer- active in understanding the risks to their
term value of our portfolios.” businesses; Swiss Re and Munich Re have Litigation
been at the forefront of raising the profile of
Institutional investors at the Investor Summit, The interest in climate change from the
climate change as a business risk rather
May 2005 legal profession has for the most part been
than an environmental issue.
restricted to the emerging markets in
Figure 2 shows that the costs, risks and carbon trading and emissions. There has
“Climate change could be the next
impacts of climate change will increase been limited attention to the issue of
legal battlefield: compensation over time. There will be a point (the tipping adaptation. As the financial impacts of
claims for man-made environmental point) driven by either a financial shock (for climate change and adaptation begin to be
damages would make the tobacco example, an extreme event) or by an recognised we are likely to see the use of
increasing awareness and understanding
sector payouts look small.” litigation as a means to recover costs. The
of the reality of climate change, when legal costs and reputational damage
Financial Times, 14 July 2003 these costs, risks and impacts challenge associated with defending climate change
expectations for value, return and growth. actions could be enormous.
At this point the financial markets,
A recent report by Freshfields Bruckhaus
analysts, credit rating agencies, investors,
Deringer has challenged the traditional
fund managers etc., are likely to review the
narrow interpretation of fiduciary duty. The
risks and their expectations of value, return
report identifies the impact of climate
and growth figures. Although for some
change as a risk which may affect any
sectors there are perhaps 20+ years before
investment; failure to assess the risks may
the impacts of climate change have a
result in claims of neglect of fiduciary duty
significant effect, the tipping-point will
by beneficiaries.
occur earlier, as investors review their
portfolios and assess their investment
liabilities.
8Significant business risks
Lawyers are beginning to acknowledge Figure 3 identifies the effect of knowledge “The effects of climate change can
that there is now sufficient information points on decision-making and litigation now be regarded as being
available on climate change for companies risks. All decisions made and advice given
reasonably foreseeable at every
to take it into account in both strategic and since the dates of the knowledge points
project level decision-making. All have an accrued litigation liability. The stage – it must be incumbent upon
decisions taken by directors and accrued litigation liability will continue to professional advisors to ensure that
professional advisers that do not take increase through continuing failures to appropriate steps have been
climate change into account may be open build climate change into decision-making. taken.”
to legal challenge. In the future the courts
Reasonable forseeability of climate change Malcolm Dowden, Charles Russell LLP
will examine claims and may decide that it
and the risk of litigation should be on the
was reasonable, at the time the decision
radar screens of all companies in their
was made or advice given, to have “It is prudent to plan for a
corporate risk assessment procedures.
foreseen the impacts of climate change,
based on the information available in the
substantial change in consumer
public domain.
Brand and reputation behaviour on climate change.”
Consumer preferences and needs will The Carbon Trust
The issue for the courts will be deciding if
change as the impacts of climate change
there were any ‘knowledge points’ from
become apparent. To take a simple
which it may have been reasonable to
example, southern European holiday
consider that the impacts of a changing
destinations may become less attractive in
climate should have been known. Potential
summer, due to increasingly hot
knowledge points may include documents
temperatures.
produced by governments, regulatory
agencies, professional institutions, sector Those sectors and individual businesses
organisations and advisory bodies setting that do not respond will find their
out the impacts of climate change and reputations suffer significant damage.
actions that may be necessary, relevant or Correspondingly those that recognise the
advised. opportunities will become sector leaders.
These knowledge points already exist. Research commissioned by the Carbon
There is generic information, for instance, Trust demonstrates that there are high
reports produced by the Intergovernmental levels of public awareness of climate
Panel on Climate Change (IPCC) and also change in the UK, and that it may not be
sector-specific information . Some long until it becomes a mainstream
examples of these knowledge points are consumer issue.
given in the sector summaries in later
sections of this report.
Figure 3: Increasing liabilities
Climate change impacts
Increasing impacts, risk and cost
IPCC First
Assessment Report
Future
1990 Generic
knowledge point Now
Accrued liabilities for decisions Accumulating liabilities
which are not climate-proof
9Significant business risks
“The insurance industry has to These are the conclusions from the Other sectors will be similarly affected with
respond to customer and research. changes to credit ratings and higher costs
of capital as they reach their own tipping
shareholder needs. Both will • The public today are aware of the
points.
increasingly look to the industry to prospect of climate change. Two thirds
provide effective responses to the of Britons say they know ‘a great deal’ or
Growing government action on
‘a fair amount’ about it.
threats caused by climate change.” adaptation
• In banking, the mostly likely exposure to
Evan Mills, Staff Scientist, The response by governments in Europe to
climate risks arises from a bank’s
Lawrence Berkeley National Lab inevitable climate change has so far been
investment and lending exposure. A
patchy. In the UK we have seen a
bank’s position on decisions such as
tightening of building regulations and
“Increased losses could raise the mortgage conditions on properties
planning policy controlling the use of land
cost of capital and increase the exposed to increasing flood risk may
and construction standards in response to
cause a negative response from
volatility of insurance markets.” consumers.
concerns over increasing flood risk and
subsidence risk due to climate change.
ABI 2005
• In some sectors, the lead time for action The EU is currently considering a floods
could be several years, leaving directive and an adaptation strategy with
unprepared companies at risk. calls for greater controls on spatial
planning.
• There is an opportunity for differentiation
against competitors. Forward-looking Government action on adaptation is not
companies need to assess the risks, to confined to flooding. A new Planning
avoid falling behind on such a Policy Statement, PPS26, focused
mainstream consumer issue. specifically on climate change, will be
published towards the end of 2006. All
This research is confirmed by further work
sectors could be affected by changes in
recently commissioned by BSkyB, which
government policy and regulations. There
found that 81% of UK consumers are
are already, for example, calls for the
"strongly concerned" by climate change or
introduction of ‘maximum workplace
“recognise it as important”, demonstrating
temperatures’ for factories, offices,
a significant latent demand.
schools, hospitals and public buildings. If
The insurance sector is showing such standards were introduced, there
leadership in this area recognising that could be significant financial impacts
consumer preferences and needs will be arising from the increased capital and
different. A recent report commissioned by maintenance costs necessary to adapt
CERES explores the opportunities for new buildings.
products and services.
It is inevitable that legislation and
regulations will change, as will supporting
Credit rating
guidance, codes of practice and standards
Credit ratings and the cost of capital will in response to the impacts of climate
change in response to the actual and the change. This will impose future liabilities
perceived impacts of climate change. The which may require remedial action.
tipping points on value, return and growth Climate-proofing strategies and projects
are likely to trigger rating revisions and now is a sensible adaptation action. The
increases in the costs of capital. We are longer the delay by business in responding
already seeing these movements in the to inevitable climate change, the more
insurance industry. likely we are to see governments respond
and act more aggressively with
The increasing frequency and intensity of
prescriptive regulation on adaptation.
climate-related catastrophes has exposed
a number of insurers and reinsurers who
had underestimated their catastrophe
exposures. Credit rating agencies around
the world have been reassessing the
exposures of the industry and adjusting
credit ratings accordingly. Increasing
storm activity and intensity and the impact
of more frequent droughts, heatwaves,
fires, subsidence and heave, together with
the effect on business continuity and
increasing director and officer liabilities will
increase the pressure on the insurance
industry.
10Sector summaries
S ec tor su mmari es
2%
Vulnerability to climate change varies exposure to climate risks, 32% expressed 5% Answered questionnaire
significantly from sector to sector, and a medium level of concern, 46% 10% Provided information
from company to company. This variation expressed a small amount of concern, and No response
depends on the individual business or 9% were not concerned at all.
Declined to participate
sector’s ability to manage the physical,
Figure 5 shows the level of concern over
litigation, financial, reputational and market
climate risks expressed by CDP4
risks of future climate change.
respondents, by sector and as a total. 83%
The following analysis is not intended as a
The highest proportion of ‘highly FTSE 100
comprehensive examination of the climate
concerned’ respondents were found in the
impacts on individual business sectors. It 11%
following sectors: Utilities (50%), Banks
is based on the responses received from 36%
(43%), Chemicals (33%), and Mining, steel
the CDP4 information request,
and other metals (29%).
supplemented by our comments. It
highlights the likely risks and The highest proportion of respondents
demonstrates the potential scale of the who expressed little or no concern were
impacts if businesses fail to take account drawn from the following sectors: Software
38%
of climate change as a business risk. A and computer services (100%), Media and
15%
complementary report has been prepared entertainment (91%), Real estate (89%),
FTSE 250
for the Carbon Disclosure Project by Pharmaceuticals and biotechnology
Trucost, which analyses the responses in (80%), Automobiles and machinery (80%),
the context of greenhouse gas emissions. Leisure and hotels (75%), Aerospace and Figure 4: Response rates to the CDP4 information
request from the FTSE 100 (top) and FTSE 250
defence (67%), Chemicals (67%), and (bottom).
CDP4 questionnaire response rates for the
General retailers (67%).
FTSE 100 differ considerably from the
response rates of the smaller companies A modified version of the Financial Times
that make up the FTSE 250, as shown in sector classification system was used for
Figure 4. Whereas 83% of FTSE 100 this analysis. Because of the large number
companies answered the questionnaire, of sectors and the low response rate in
only 36% of FTSE 250 did so. The some sectors, we merged some sector
proportion of companies that provided categories on the basis of similar climate
information in place of a questionnaire risks. As an example, we combined the
response was similar: 10% for the FTSE ‘Mining’ sector with the ‘Steel and other
100 and 15% for the FTSE 250. Only 7% metals’ sector to create a new ‘Mining,
of the FTSE 100 companies declined to steel and other metals’ category.
participate or did not provide a response.
In the following sector summaries we
By contrast, half of the FTSE 250
provide a very brief outline of FTSE 350
companies (49%) declined to participate in
respondents’ perception of the climate
the CDP4 process or provided no
risks faced by their company,
response. A list of the companies in the
accompanied by quotes drawn from
FTSE 100 and FTSE 250 is provided in
company responses. We have included
Appendix 5.
some quotes from the FT 500 responses,
Responses to Q3 (and, to some extent, though these are not included in the
Q1) of the CDP4 questionnaire described analysis. This is followed by our expert
the level of understanding and concern analysis of each sector’s exposure to
about the risks posed to companies by the climate risks, and case studies of impacts
impacts of climate change. Our analysis that are already being felt.
shows that, of the 165 UK companies that
responded to the CDP4 information
request, 13% are highly concerned about
11Sector summaries
100%
Percentage of respondents
None
Small
80%
Medium
60% High
Level of concern
40% over climate
change risks
20%
0% es
te
bu tec nce
ce
Al ices
ce
es
G & d es
ls
s
e
rs
ec y
se rt
el Che ks
rm s
es
it y
r s ent
y
s
m gy
er
r
ur
he cal
er
al
o
ia
ta
to
st
ag
ic
c
en
n
an
iti
r ic
lo
p
et
l
is
n
pu ainm
er
vi
a
i
Ba
en l es
ga indu
ec
v
rv
ta
i
til
pp ans
To ildin no
hi
er
m
in
le
ef
ur
t
er
er
at
U
re
ac
ls
rf
ev
s
h
sp n s
&
a
Su Tr
In
el
t
Re
al
he
m
d
rt
co ter
od & b
ls
te
g
te
io
er
o
s,
ot
e
e
ot
&
o
ac
Ae cat
la
ot
en
bi
o
s
&
re
&
H
m
cc
ile
ar a &
i
&
&
un
C ace alty
ob
ba
ro
te
s
il
ftw edi
m
al
O
&
Fo
s
&
m
i
ec
ic
m
n
g,
So M
to
e
ut
io
co
Sp
in
Au
ct
in
le
ru
Te
M
m
st
ar
on
Ph
Figure 5: Level of concern over the risks posed to companies by the impacts of climate change.
“At the moment we do not Aerospace and defence the availability, or disruptions to the
supply, of either resource will affect sector
anticipate major threats to our key Despite the significant potential climate
performance.
facilities due to climate change.” risks in this sector, most aerospace and
defence respondents (67%) show little or • This industry is also reliant on production
Rolls-Royce, FTSE 100 line and factory workers, whose comfort
no concern about the impacts of climate
change on their business. and productivity can be compromised by
“Every individual is exposed to the • Like all high technology and engineering
warmer working conditions.
effects of extreme climatic events industries, the aerospace and defence
Automobiles and machinery
and changes.” sector is vulnerable to any disruption in
supply chain or manufacturing CDP respondents in this sector do not yet
BMW, FT 500
processes. Both incremental changes appear to have experienced losses or
and extremes of climate can interrupt increased costs due to climate risks. These
“The potential effects of climate engineering operations. Just-in-time industries are most vulnerable where
change include a combination of manufacturing and delivery systems can businesses are dependent on climate-
exacerbate the vulnerability of supply sensitive resources, or where their supply
physical and material damage as chains and operations. and operations are affected through
well as operational losses. Other consumer behaviour or transport disruption.
• Climate variability and change can also
possibilities are image risk, third- Of those who provided a response to the
have knock-on impacts on quality,
party liability and, in certain cases, timeliness, precision and performance in
CDP questionnaire, 80% expressed little or
no concern about climate risks.
market risk. To date, there have manufacturing.
been no tangible or visible effects in • The climate risks to global security are
• Climate variability and change can cause
significant supply chain interruptions to
our operations.” potentially enormous. Climate change will
intensive production schedules, with
likely trigger severe disruptions with
Renault, FT 500 subsequent cost implications. Transport
significant consequences for local,
systems, on which the global supply chain
regional, and global security. These
depends, are also vulnerable to climate
events could exacerbate existing
impacts. The high value of finished stock
tensions, prompting diplomatic and trade
in transport or port storage is vulnerable
disputes. In the worst case, extreme
unless the ports and shipping risks are
events have the potential to destabilise
managed.
the global economy and geopolitical
balance, and incite conflict. The market • The complexity of this sector’s production
repercussions for the aerospace and network makes it vulnerable to
defence industries are considerable. interruption. The automobile and
machinery sector should review the
• This sector is heavily reliant on both water
climate risks to supply chains and
and energy. Climate-related reductions in
logistics, particularly where extreme
12Sector summaries
events have the potential to cause opportunities associated with climate “Barclays considers adaptation to
significant disruption. change are actively considered within be an important issue which society
investment processes.
• Higher indoor temperatures, when must start to address in order to
combined with the heat of process • The office-based banking industry also face the future impacts of climate
environments, will result in more faces business risks from decreased change.”
uncomfortable working conditions. This employee productivity in buildings that
has the potential to reduce productivity are not designed to cope with higher Barclays, FTSE 100
and increase workforce health risks, temperatures.
respiratory problems and absenteeism.
• Much of the discussion on climate risks “The impact of climate change on
Any adaptation strategy will need to
weigh up these productivity costs
and vulnerability for the insurance sector the costs of extreme weather
against, for example, costs of improving
is relevant to the wider financial service events is of major concern to
sector because of the inter-linking of
building ventilation.
insurance and capital markets.
HBOS, particularly as we are the
• Process environments will become hotter UK’s leading mortgage lender and
• A proactive stance on dealing with climate
with increased need for cooling. Any home insurer.”
change could enhance the reputation of
additional cooling must be low carbon, in
individual banks and the financial sector. HBOS, FTSE 100
line with climate change mitigation
objectives. Increased humidity will
Chemicals
increase drying time for painted products. “Climate change, climate policy and
Some product components and testing One third of CDP4 respondents in this adaptation processes create risks
regimes may need to be adapted to cope sector are highly concerned about their
as well as opportunities for Bayer.”
with climate change. exposure to climate risks.
Bayer, FT 500
• Regulatory risks include the possible • Rising ambient air temperatures,
introduction of maximum working variations in water quality, and the
temperatures in manufacturing and availability of cooling water will all have an
process environments. effect on chemical processes. These must
be considered thoroughly, as they will
Banks have knock-on impacts across all
activities in this sector.
Respondents in the banks sector show a
high level of awareness of the risks they • Low river flows during hot, dry summers
face from the impacts climate change. Over can lead to restrictions on water
85% of companies who responded to the abstractions, with consequences for
CDP4 questionnaire in this sector cooling processes when the need for
expressed a high or medium level of cooling is highest. Low flows also mean
concern about the vulnerability and restrictions on the volume of high
exposure. temperature water that companies are
allowed to discharge to rivers and
• The banking sector faces a potentially
streams, with impacts on production.
high level of risk if investments are made
Finally, low river flows are less able to
in assets that are vulnerable to climate
dilute pollutants, leading to tightened
change. Climate risk management
restrictions on effluent discharge.
strategies should incorporate a risk
screening for assets and investments. • Changes to chemical processes,
particularly under extremes of high
• Fund managers face potential risks and
temperature, will affect process
opportunities associated with climate
operations and corrosion rates.
change. These include risks to equities,
debt (both corporate and governmental), • Volatile chemical storage procedures will
and real estate. Impacts will vary between need to take account of rising
sectors, companies, and the countries in temperatures and the impacts on tank
which particular assets are based. pressure. The stability and performance of
some chemical formulations are
• Corporate investment decisions made
temperature dependent.
now should take into account the
potential physical impacts of a changing • Vulnerability of supply chains may lead to
climate. Where possible, adaptation an increased disruption to supply. This
strategies should ensure that they are may mean that providing additional
appropriate to future climate risks. materials storage capacity may be
desirable to provide greater resilience.
• As climate change will affect shareholder
value now and in the future, fund • There are considerable regulatory risks to
managers should be taking appropriate consider, as handling, transmission and
steps to ensure that the risks and storage safety standards may be
compromised.
13Sector summaries
“No direct physical risks today or Construction and building materials • The vulnerability of housing and
expected for the future.” As buildings generally have an expected
commercial developments to floods is
partly a function of design and the
Saint-Gobain, FT 500 lifetime of between 20 and 100 years, it is
materials used. Modern housing is more
important that we take the impacts of
vulnerable to flood damage because of
climate change into account when
“Climate change impacts on our designing or retrofitting our built
the greater use of chipboard floors, dry
wall plasterboard, cavity insulation, and
business in several areas, e.g. environment. Despite this, more than 40%
design features such as lower door
design of buildings, infrastructure of companies in this sector expressed low
thresholds to improve access.
and support services, transport, levels or no concern over their vulnerability
in the face of a changing climate. • Building design should take full account
biodiversity, through our supply of future potential water constraints,
chain and through all our • Many non-domestic buildings such as
through use of ‘grey water’ recycling and
offices and shops have high internal heat
atmospheric impacts (energy and gains and therefore require cooling in all
other water conservation practices.
fuel consumption).” except cold winter weather. Temperature • Climate change adaptation and
Carillion PLC, FTSE 250 increases will significantly increase mitigation are closely related for the built
cooling loads in new and existing environment; many single measures will
building stock. It is vital that any new have effects on both. For example
“Sainsbury’s is potentially affected cooling is low-carbon, in line with planting trees reduces summer
by these symptoms of climate emissions reductions targets. Warmer temperatures (adaptation) and cooling
change both directly (in so far as winters will also reduce heating loads (mitigation).
requirements.
store operations, warehousing and
distribution could be affected having • In order to meet comfort criteria for a
present-day ‘hot’ summer, several
a direct effect on product
features can be included in building
availability) and indirectly (in so far design to manage indoor temperatures.
as our global supply chain could be Examples are high thermal mass,
affected by events further afield shading, and natural (windows open) or
which in turn could potentially mechanical (fans) night-time ventilation.
These features may be lacking in existing
compromise product availability).” buildings, and are expensive, difficult or
J. Sainsbury, FTSE 100 sometimes impossible to retrofit.
Figure 6: Knowledge points for construction and building materials sector
2006 Adapting to climate change: lessons for London
London Climate Change Partnership
2005 Beating the heat: keeping UK buildings cool in a warming climate
Arup and UKCIP
Climate change and the indoor environment: impacts and
adaptation CIBSE TM36
Adapting to climate change: a checklist for development
Three Regions Climate Change Group
Climate change risks in building – an introduction CIRIA
2003 Building knowledge for a changing climate EPSRC and UKCIP
14Sector summaries
Food-related industry General retailers
Buy now while stocks last
Because of its reliance on agricultural It is clear that the weather plays a (The Indepedent, 31 May 2006)
production, stable energy supplies and significant part in affecting consumer
distribution systems, the food-related preferences, and the complex distribution • GlaxoSmithKline, the company that
industry is exposed to climate risks across systems of general retailers can make this owns Ribena and buys 95% of the
all activities. CDP respondents in this sector vulnerable to the impacts of climate UK blackcurrant harvest, is
sector as a whole have not grasped the change. Despite this, none of the general concerned that production of the fruit
sector’s vulnerability to climate risks, with retailers who responded to the CDP4 will suffer in milder winters.
only 12.5% of companies expressing a questionnaire expressed a high level of • The pharmaceutical group has asked
high level of concern about the impacts of concern. More than two thirds of scientists to cross-breed varieties
climate change, though a few market respondents expressed low levels or no that are less reliant on harsh winters
leaders are taking this issue very seriously. concern over their vulnerability in the face and heavy frosts.
of a changing climate.
• As part of a wider global market, the • Growers of UK blackcurrants have
UK’s food-related industry is vulnerable • General retailers are less exposed to the noted that crops, currently worth
to the complex impacts of climate direct impacts of climate change than, about £10 million annually, have
change on competitors and customers. for example, the agricultural or declined in recent years.
manufacturing sectors, but they face
• Higher temperatures, changing patterns
knock-on impacts in terms of supply
of rainfall, and knock-on impacts on
chains and distribution, premises, and
pests, diseases and competing plants all
changing structures of market demand. A weather eye on the bottom line
mean that crops may no longer be
(The Observer, 6 August 2000)
economically viable in current locations • All premises and transport systems are
under future climate conditions. Crops vulnerable to weather-related events like • Weather has a strong effect on
that remain workable may be of reduced floods, storms, subsidence. consumer preferences, and retailers
quality. Infrastructure for transport and utilities is stand to benefit by taking this into
particularly vulnerable, and therefore account for supply planning.
• Current production methods and market
places at risk wholesale and retail trade
standards (e.g. supermarket washed • The Observer reports that sales of
businesses.
produce) are water and energy intensive, canned lemonade rise as
and may become increasingly • Retailers with global markets or temperatures exceed 18°C, but
expensive. suppliers will be affected by climate decline again on very hot days when
change impacts in other countries. consumers prefer water to quench
• Diversification into new crops with which
their thirst.
they have little experience growing • People tend to consume different kinds
exposes producers to vulnerability. In of products in different weather • Banana sales slump during cold
addition, investment in equipment conditions and in different seasons. months and also perform badly
constrains producers to specific crops Market opportunities may result from during the hottest months.
until the capital is repaid, making it climate change.
• Understanding the impact on
difficult to diversify.
• The impacts of temperature, rainfall and customer demand can be the
• As temperatures increase, suppliers and wind upon the buildings in which retail difference between a good and a bad
distributors will be increasingly forced to business is conducted are important. trading statement.
rely on refrigerated/cooled systems for Working conditions in such buildings
Sales suffer after hot summer
produce and livestock. Any new could become adversely affected in high
(Financial Times, 8 September 1995)
refrigeration or cooling systems should summer temperatures, reducing morale
be low-emission and low-carbon, in line and productivity, whilst driving rains • The long hot summer of 1995
with emissions reductions targets. could necessitate higher levels of routine affected seasonal consumer
maintenance. Additional cooling may be purchasing patterns, with customers
• During hot, dry summers there will be an
required to alleviate higher working uninterested in autumn and winter
increasing risk of interruption of water
temperatures, and this must be achieved clothing while temperatures remained
supply to irrigation systems.
without jeopardising emissions high.
• Staff may need training in new skills reductions targets.
• Many retailers postponed acceptance
associated with new crops, new
of, and payment for, autumn/winter
technologies and new approaches to
orders, causing share prices in some
land management. A largely outdoor
clothing manufacturers to suffer.
agricultural workforce is at increased risk
of heatstroke and skin cancer. It s too hot to shop as records tumble
(Daily Telegraph, 27 July 2006)
• Continuing hot weather is causing
problems for shops with sales down
5%.
• Department stores reported that
trade was down 7.3%.
15Sector summaries
Hotels and leisure • Hotels and other leisure developments
Breton tourism boosted by the must be built with the future climate in
heat wave (AFP, 14 June 2004) The global nature of the hotel and leisure
mind. Many hotels, cafes, restaurants,
industry makes this sector particularly
• Tourism professionals in Brittany and visitor attractions in the UK do not
vulnerable to climate risks worldwide. It will
attributed one million additional have air conditioning at present. Low-
be affected by market shifts in the UK, as
visitor nights in last minute carbon cooling of indoor environments
well as changes to global competitors and
reservations or lengthened stays to may be necessary to meet customer
international consumer preference. Despite
the heatwave of August 2003. expectations.
this, none of the CDP respondents indicated
• Visitors keen to flee the strong heat of that they were highly concerned about their • Riverside locations may become less
the south or centre of France found exposure to climate risks. Three-quarters of attractive with increased risk of flooding.
refuge on the moderate Finistère the leisure and hotel respondents expressed Sports and recreational fishing could
coast of Brittany. a low or no level of concern. suffer in dry summers, and there may be
insufficient water to maintain inland
Global warming to wash away • Southern Europe and other traditional
canal navigation. Maintaining water
beaches, warns Spanish study (The destinations may become less attractive
quality will be critical during hot, dry
Guardian, 11 September 2006) for summer holidays due to increasingly
summers with low stream flows. This
hot temperatures and the potential for
• Spain’s beaches are expected to could also affect the attractiveness of
water availability problems and loss of
decrease by an average of 15 metres waterside commercial leisure
beaches to sea level rise.
by 2050, according to a Spanish developments.
environment ministry report that • Though this may result in increased visits
highlights the effects of rising sea to British and other northern European Insurance
levels and stronger waves and destinations, in order to exploit this
The insurance industry has considered
currents on the country’s coasts. potential opportunity operators and
adaptation more thoroughly and for longer
managers must maintain a high quality
• Holiday homes on unprotected than most other sectors. Most major
environment, efficient transport systems
beaches are directly at risk of insurance organisations globally are
and sufficient capacity to cope with a rise
flooding. beginning to ask questions and produce
in tourist numbers, all of which will be
guidance on management of climate risks.
• The report’s coordinator, Professor vulnerable to climate risks.
More than half of the respondents in this
Raúl Medina, said that property in • Sea level rise, coupled with an increased sector expressed a high or medium level of
areas currently popular with British frequency and severity of sea storm concern about climate change impacts,
holiday home buyers is an surges will contribute to the loss of UK reflecting the fact that this industry is
increasingly bad long-term beaches. gaining a clear understanding of the
investment. complexity of this as a business issue.
Scotland s ski industry balances Figure 7: Knowledge points for insurance sector
precariously (Financial Times, 10
January 2006)
2006 Climate change: adapt or bust Lloyd’s
• The number of skier days across
Scotland fell to just under 150,000 in
the 2005-06 season, down from over
650,000 in 1987-88, according to Visit 2005 Availability and affordability of insurance under climate change:
a growing challenge for the US CERES
Scotland.
• The impact of climate change on the Financial risks of climate change Association of British Insurers
already unpredictable winter sports
season has influenced managers to
market ski resorts as all-year
2004 A changing climate for insurance Association of British Insurers
destinations. This follows the
example of Whistler in Canada, a
centre for skiing in winter and
mountain biking and walking in the 2002 Climate risk to global economy UNEP Financial Initiatives
summer.
2001 Climate change and insurance Chartered Insurance Institute
Climate The implications of climate change for the insurance industry
change
& insurance Building Research Establishment
Chartered
Insurance
Institute
1994 The impact of changing weather patterns on property insurance
Chartered Insurance Institute
16You can also read
