Climate Change and Extreme Weather Will Put Risk Management Pressures on Industry
Recent extreme weather in the United States and other parts of the world prompted many commentators to evoke the specter of global warming once again. “This is what global warming looks like,” said one climate scientist who was quoted in a Associated Press story.
Weather events affect the stability of supply chains, workforces, markets and the economy, so business decision-makers are naturally concerned about weather-related risks associated with climate change.
Agriculture is one of the industrial sectors most vulnerable to extreme weather, and the effects of the current drought on U.S. grain crops show how supply chains can be disrupted by climate effects.
According to a report from Reuters, the United States is in its worst drought since 1956. Only 31 percent of the nation’s corn crop is in good-to-excellent condition, as is only 34 percent of the soybean crop. Corn and soybean prices are at record highs.
I spoke recently with scientist Michael Ferrari, director of climate informatics for CSC (previously Computer Sciences Corp.). Ferrari helped develop CSC’s ClimatEdge, a set of reports designed to assist business decision-makers managing climate risks.
Ferrari agrees that agriculture is particularly vulnerable to climate effects. “Across the agricultural sector, this is going to be a very difficult year,” he tells me. “We’re seeing this across the grains — corn, soybeans, wheat, rice. Corn is very volatile right now. In the past, we’ve had good buffers of corn stocks, but the global buffer of stocks, particularly corn, is very thin right now.”
But disruption in one market can have ripple effects on others, he points out. Corn is used for more than just food, notably cattle feed and biofuels. “Look at all of the products where corn is an ingredient. The increase in corn prices is going to have fallout, through price increases on the consumer side.”
Another example Ferrari points to is sugar production in India. “India is dependent on a good monsoon for a good sugar crop,” Ferrari says. The South Asia monsoon brings strong offshore winds that carry moisture from the Indian Ocean over land from June to September, increasing precipitation. However, the monsoon has become increasingly perturbed in recent decades.
Ferrari says India is 25 to 36 percent below normal precipitation levels this year. “We could be at the point where sugar prices will increase 25 to 50 percent over the next six months,” he says.
As with corn, many businesses use sugar as a primary ingredient in their products, so again, shortages and price instability can have ripple effects. “Smart companies are protecting themselves and will be okay,” Ferrari says. “But many companies are expecting a good monsoon and will probably be in for a surprise,” he tells me.
Ferrari’s comments emphasize that climate change, extreme weather and their effects on the economy are complex. Every sector will be impacted in its own idiosyncratic way, and this points to the value of enterprise climate risk management.
Managing the Risks
“Physical Risks From Climate Change,” a report from Oxfam America in partnership with Calvert Investments and Ceres, a network of investors focused on sustainability leadership, says:
The year 2011 set records for economic losses and insured losses caused by natural catastrophes, with extreme weather events accounting for 90 percent of the disasters and eight of the 10 most costly, resulting in overall losses of more than $148 billion and insured losses of more than $55 billion. Climate change is predicted to increase these trends.
The report urges companies to “manage climate risks like other business risks,” employing such processes as enterprise risk management, business continuity planning and scenario planning.
Underlining Oxfam’s advice, a document from the U.S. Securities and Exchange Commission (SEC), “Commission Guidance Regarding Disclosure Related to Climate Change,” points out that severe weather “can cause catastrophic harm to physical plants and facilities and can disrupt manufacturing and distribution processes.” Companies with operations in coastal areas have particular vulnerability.
Indirect effects can result if a company’s key customers or suppliers experience disruptions. Risks from severe weather can result in higher insurance liability and premiums and more claims. The agency says companies should start incorporating climate risks in their disclosure documents.
Odds of Extreme Weather Are Increasing
Most climate scientists support the idea that human-caused global warming will result in extreme weather. When it comes to connecting one to the other, CSC’s Ferrari tells me: “You can’t pinpoint a specific event and attribute that to climate change. You can say that the likelihood of these events will increase as more heat gets trapped in the atmosphere. You can look at a period of 10, 15 or 20 years and say that the number of those events can be expected to increase.”
A newly released report by the National Oceanic and Atmospheric Administration (NOAA) in July, “State of the Climate in 2011,” states that large-scale climate patterns influenced temperature and weather patterns around the globe in 2011. Many — but not all — of the weather effects are attributed to La Niña conditions, which are characterized by unusually cool water temperatures in the Pacific Ocean. According to the report, the 2011 combined average temperature across global land and ocean surfaces was the coolest since 2008, but was also among the 15 warmest years on record and above the 1981-to-2010 average.
The report stresses that determining the causes of extreme events remains difficult. However, continuing research is helping scientists understand “how the probability of extreme events change in response to global warming.” NOAA says the findings show that:
- La Niña-related heat waves, like the one in Texas in 2011, are 20 times more likely to occur in La Niña years today than La Niña years 50 years ago.
- The United Kingdom experienced a very warm November 2011 and a very cold December 2010. In analyzing these two very different events, U.K. scientists uncovered interesting changes. Cold Decembers are now half as likely to occur now versus 50 years ago, whereas warm Novembers are now 62 times more likely.
Obviously, weather is variable. Sometimes records are going to be broken on the hot side and sometimes the cool side. But Kevin Trenberth, senior scientist with the National Center for Atmospheric Research, recently pointed out to PBS Newshour that we’re seeing an ominous trend right now:
With an unchanging climate, you expect that the number of high temperature records and the number of low records are about the same. And that was the case in the 1950s, ’60s and ’70s. And then by the 2000s, we were breaking high-temperature records at a ratio of 2 to 1 over cold-temperature records.
But this year, we’ve been breaking high-temperature records at a rate of about 10 to 1. Ironically, there are still some cool spots, mainly in the Pacific Northwest — and cold-temperature records continue to be broken. So breaking records is not an indication of climate change, but breaking records at a rate of 10 to 1 versus the cold records is a clear indication of climate change.