Preparing For The Next Threat: Unlocking Barriers To Climate Resilience

Blog | Read Time 10 min | SUSTAINABILITY TRANSFORMATION SERIES
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Malavika Bambawale Managing Director, Sustainability Solutions - APAC
Tara Norton Global Head of Supply Chain, Sustainability Solutions - EMEAI
Myriam Akhoun Director, Sustainability Solutions - APAC
Climate Resilience
Climate Risk
Climate Change
Sustainability Transformation

Amidst waves of severe shocks and stresses, climate resilience has become an increasingly urgent priority for leaders across the public and private sector. Three levers can help organizations better predict and act on looming risks.

The COVID-19 pandemic has presented a challenge of unprecedented scale, exposing vulnerable supply chains, crumbling infrastructure, and dysfunctional systems driving accountability. But COVID-19, though large, has an end in sight. Climate change poses a grimmer reality, presenting perpetual physical, economic, and social impacts that will occur both in the form of unexpected, severe shocks and gradual, chronic stresses. The number of reported disasters has nearly tripled since 1980, and the cost of those disasters is up 600%, to nearly $200 billion every year. This cost is expected to rise to $234 billion by the year 2040.

This article, including learnings from the current pandemic, will explore three key levers that can be used to improve the resilience of your business against the systemic shocks and stresses posed by climate change. Organizations that successfully capitalize on technology, rethink finance and operations, and form partnerships to tackle our largest challenges will be best suited to both prepare for risks and implement measures that build resilience.

Why is climate risk so challenging to manage?

Businesses and governments alike have long been aware of the looming impacts of a changing climate. Though sustainability goals have become increasingly ambitious, companies and cities alike have been slow to integrate climate risk into overall risk management strategies and long-term investment decisions. The delay can be attributed to two underlying gaps: a failure to appropriately understand these risks and hurdles in our foundational systems to execute on them.

The Knowledge Gap: Risks Are Challenging to Understand

Organizations face a tremendous gap in intelligence when attempting to understand risk. While organizations are aware of the global risks driven by climate change, translating those complex, intersecting risks into the direct or indirect impacts on a city or business is uniquely challenging for the following reasons:

The risks we face are not only ‘quantifiable’ risks such as physical, financial, and insurance risks, but also ‘unquantifiable’ longer term risks such as loss of goodwill, weakening relationships with suppliers, and stakeholder pressure.

These risks also occur on varying time horizons. There are acute, disruptive risks like pandemics, floods, famines and hurricanes, but there are also chronic, gradually increasing risks such as softening consumer demand, rising inequality, regionalization, and regulation.

Building climate resilience requires gathering the intelligence to reduce the unknowns to best prepare for complex and interconnected risks, while simultaneously building a foundation of information and processes to act quickly amidst the unpredicted, disruptive risks.

The Implementation Gap: Mitigative Measures Are Difficult To Execute

Challenges that are difficult to quantify and predict are inherently difficult to mitigate. Complex, collective challenges like rising sea levels, population growth, resource scarcity, and increasingly frequent fires, floods, and droughts will require solutions that fall outside of typical investment criteria, that defy lean operating models, and that pose challenges of a scale exceeding what can be tackled by a single organization. These systemic barriers ultimately reduce accountability and stall individual and collective progress.

  • Organizations face tension between efficiency and resilience. Foundational systems that were built to maximize profitability compete with the core tenets of building resilience. Seeking the lowest costs can drive companies to centralize operations and minimize redundancy, the exact opposite of what’s needed to build resilient systems. Consider supply chains. Following decades of globalization with immense downward pressure on costs, supply chains have grown into incredibly complex, multi-tiered networks distributed across the globe, dependent on low-cost labor and complex transportation networks. The supply chains that shareholder capitalism has built are now uniquely vulnerable to rising regulatory, economic and physical risks.
  • The scale of risk demands collective action but aligning incentives across diverse stakeholders remains challenging. In moments of crisis, diverse groups of organizations manage to band together across a community. The COVID-19 pandemic has revealed a myriad of examples in which cities, hospitals and businesses have come together to build temporary hospitals, create vaccines or connect citizens with testing facilities. However, rallying collective accountability is far more challenging to activate when it comes to planning rather than reacting.

Though stakeholders have engaged in cross-sector and multi-stakeholder collaborations for years to drive resilience planning, these actions must be accelerated to meet the moment. Partnerships across diverse stakeholders often fail to gain momentum due to misalignment of incentives or limited visibility across groups. Without a carefully crafted business cases driven by shared directional visions, engagement models, and transparent progress reporting, collective action will stall or erode over time.

Activate lasting resilience: Three unlocks for resilience capability gaps

As organizations build their risk mitigation strategies, they must integrate climate-related risks. Within this planning process, organizations should classify the risks they face by severity and predictability.

The matrix below provides a guide for organizations to assess their risks. The less predictable the risk, the greater the need for foundational systems that arm organizations with the necessary intelligence to effectively act in moments of crisis. The more severe the risk, the greater the need to unlock additional sources of funding or form coalitions to share in the costs and risk of mitigative measures.

Identify The Gaps In Your Risk Management Strategies Based On Predictability And Severity Of Risk

Predictability of Risk Infographic

To best address the knowledge and implementation gaps that both business and governments face, we will focus on three key opportunities: technology, operational buffers, and coalitions.

The COVID-19 pandemic has exposed tremendous systemic weaknesses, but clear solutions have also emerged. Successful companies and governments used science and technology to model and test the spread of the virus, used those insights to quickly shift operations, and formed coalitions to implement the necessary measures. These are the same levers that must be employed to better plan and execute on measures that build climate resilience.

Unlock Gaps In Resilience With Three Levers

Climate Resilience Knowledge and Implementation Gap Infographic

Technology

Use technology to better model and track complex systemic risks

New tools have emerged that significantly narrow the knowledge gap. These tools will help entities better model future risks and respond quickly in times of crisis. Leaders should consider investing in the following:

  • Assess at-risk assets and suppliers with climate mapping tools. Climate science models have proven to be highly accurate and new tools make these models even more accessible. The models can now be used to inform real estate decisions, infrastructure design, manufacturing planning and to map sourcing risks. One such tool is Aqueduct Floods, a global online mapping tool developed by the World Resource Institute, that not only estimates at-risk regions, but quantifies the property damage and human casualties, and evaluates the impact and cost-benefit of possible interventions.
  • Digital twins can simulate complex environments to strengthen climate resilience planning. The Internet of Things and new technologies like 3D modeling and advanced simulations have quickly enhanced the ability to model complex, interconnected systems to strengthen resilience.
  • Cities around the world are using digital twins to allow policy makers, urban planners, businesses and asset owners to visualize the impact of climate risk on cities and urban projects before they've been implemented. These tools gather large data sets like real-time sensor data, building elevations and geodata into robust city simulations. These simulations inform planning for impact of flooding risks on city infrastructure, renewable energy opportunities and a myriad of other urban transformation plans.
  • The Ile-de-France region implemented a pioneering digital twin model. They sought to improve the quality of life of people in France, accelerate decarbonization measures and build resilience.

Using ENGIE's Siradel platform, the Ile-de-France region was able to aggregate data from 10,000 unique data sets in only six months, modeling over 2.5 million distinct buildings in a single, shared platform accessible to over 12 million stakeholders.

  • The visualizations helped them quickly deploy tools to help citizens evaluate solar arrays, low-carbon commute options, and a variety of other local resources.
  • With the foundational infrastructure in place, this technology enabled Ile-de-France to quickly respond to the COVID-19 crisis, standing up a collaboration platform in just three days that connected communities with the resources they needed.
  • Real-time data enhances traceability in supply chains. Blockchain makes real-time visibility of data far more accessible. This can minimize potential supply chain disruption and identify non-traditional suppliers in times of crisis. To meet their rising demand for personal protective equipment, New York’s largest health group put blockchain technology to work. Using IBM’s Blockchain application, Rapid Supplier Connect, the health group was quickly connected to a distributed network of suppliers outside of their traditional procurement system. The distributed ledger technology was able to streamline a process that would have taken months of standard procurement vetting and onboarding. Technology to enable rapid response to supply chain disruptions will be essential as extreme weather events continue to pose grave threats to suppliers in at-risk regions.

Operational Agility

Unlock investment in operational agility through robust climate risk assessments

To withstand economic shocks, organizations must invest in infrastructure, operational buffers, and flexible systems that harden assets and build agility. But both knowledge and implementation gaps hinder progress. Though companies are increasingly disclosing climate-related risks, few are sufficiently calculating the financial impact or probability of those risks. Without solving for this knowledge gap, most organizations will not be well-positioned to implement the necessary mitigative measures. Instead, organizations should leverage the lens of climate risk to revisit operational risk management and reframe investment criteria.

Established frameworks like the Taskforce of Climate-related Financial Disclosures (TCFD) provide detailed guidelines to help companies consider their most relevant financial impacts, including avoided expenditures, assets and liabilities, revenue, and capital and financing considerations. Accounting for avoided expenditures (e.g., reduced maintenance costs and lower insurance premiums) and improved access to capital (e.g., sustainability-linked loans or green bonds) can significantly redefine the business case to invest in critical infrastructure and operational agility.

Every $1 invested in resilient
infrastructure saves $6 in future costs.

By appropriately accounting for risk, companies can bolster the case to unlock the following important climate resilience measures:

  • Reframe investment criteria for capital projects with climate risk in mind. Resilience measures like microgrids, e-mobility infrastructure, and even nature-based solutions will vary in payback periods. To better account for the long-term benefits and risks associated with climate change, consider investment decisions on a portfolio basis, assessing the aggregate costs and benefits of technologies over longer-term time horizons.
  • Build buffers to diversify your risk. Increase the pool of suppliers to have the flexibility to change sources in case of a business interruption of one of them. Apply a climate risk lens to evaluate stocks and ensure enough inventory levels to resist a climate event.
  • Localize sources and suppliers. Identify local sources to increase local supplier capacity along vulnerable transportation routes and bring inventory closer to customers.
  • Invest in critical relationships across the value chain. Consider shoring up these relationships with longer-term partnerships or preferred supplier status, and work alongside them to help them understand their risks and build resilience.

Coalitions

Build the right ecosystems: Invest in coalitions to share cost, risks and learning

Diverse ecosystems will be an essential lever to tackle the systemic, collective challenges posed by climate change. While communities often band together following an extreme event, this collective action is far more difficult to rally at the planning stage. For years, forums like C40, WBCSD, and The World Economic Forum have emerged to facilitate learning and exchange knowledge. Yet gaps remain in executing on many of these collective best practices at the local level. Without clearly defined incentives and accountability, progress within local ecosystems will be slow. To best address these barriers, partners need a clear business case, carefully designed engagement models and transparent communication on progress.

  • Build bankable engagement models to invest in infrastructure. There are several business models designed to share in the upfront costs and operational risks of large infrastructure investments. In an Energy-as-a-Service model, like an on-site solar power purchase agreement, the project developer procures, owns, and installs solar panels at the host’s site, and then sells electricity to the customer on a per unit basis. The customer makes no up-front investment and pays for the service (i.e., green energy) as it benefits from it. In a shared critical infrastructure model, like those found in hospitals and airports, the resilience asset, such as a microgrid, is designated exclusively for back-up service to provide power when the grid cannot, whether due to fires, hurricanes, or other unforeseen events. The developer finances and builds the microgrid on the host’s site and is required to provide emergency back-up service to the host. At all other times, the developer is free to operate the system as a grid resource, selling power into the market. With those revenue streams now made available to the developer, the cost borne by the host is significantly less than if it had built the system itself.
  • Use circular models to unlock both resilient resources and new value streams. There is tremendous opportunity to optimize resource consumption by initiating circular partnerships, in which the wasted resource of one provider becomes the fuel for another. Progressive leaders in clustered, resource-intensive ports have provided a blueprint for these circular models. In 2018, at the Port of Dunkirk, local businesses came together to map the energy, water and material streams generated by their local ecosystem. With this transparency, businesses were able to identify strategic synergies and partnerships strengthened by robust business models. By modelling the cost savings and environmental benefits, the business cluster was able to quickly define a symbiotic relationship in which businesses were able to exchange resources, reducing environmental impact at a fraction of the price. These symbiotic partnerships not only secure more localized and resilient resource reserves, but also unlock new value streams for participants.

Why act now?

Use pivotal moments to accelerate change

As Stanford economist Paul Romer once said, “A crisis is a terrible thing to waste.” At this moment, on the heels of COVID-19 and amidst the most important decade to act on climate change, leaders must capitalize on the increased willingness and urgency to implement transformative changes that build resilience.

Organizations have already seized on this moment to accelerate climate resilience efforts. The European Commission has put forth a coronavirus pandemic recovery bill explicitly linked to advancing progress toward climate neutrality goals. In Genoa, Italy, construction crews have completed the rebuilding of the Morandi bridge in record time, replete with solar panels to fuel the robust network of sensors that monitor maintenance needs. In Pakistan, the government redirected more than 63,000 laborers affected by the pandemic to plant tree saplings to rebuild forests and mitigate climate change.

The solutions are within reach and the collective mindsets are primed for action. To build true resilience, businesses and governments must leverage the urgency of the moment to enact structural change, adopt new technology, and come together to jointly enact progress.



The authors would like to thank Sabeeha Islam and Jeff Waller for their contributions to this article.



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