Corporations love to talk about going green, but not many are planning for a changing climate.

A journalistic collaboration on climate change.
April 19 2010 11:35 AM

Risk Mismanagement

Corporations love to talk about going green, but not many are planning for a changing climate.

Illustration by Christoph Hitz. Click image to expand.

About a decade ago, Miguel Torres planted 104 hectares of pinot noir grapes in the Spanish Pyrenees, 3,300 feet above sea level. It's cold up there and not much good for grapes—at least not these days. But Torres, the head of one of Spain's foremost wine families, knows that the climate is changing.

His company's scientists reckon that the Rioja wine region could be unviable within 40 to 70 years, as temperatures increase and Europe's wine belt moves north by up to 25 miles per decade. Other winemakers are talking about growing grapes as far north as Scandinavia and southern England.

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Torres' Pyrenees vineyards are a hedge and may not be necessary. But if climate change redraws the map of Europe's wine world, he will be prepared. And his company will be one of a very few taking steps to adapt to the future effects of climate change.

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How companies are preparing for these changes is a pressing topic, but when I agreed to write this piece, I knew I was no expert. I set out to educate myself by posting open requests on my finance blog at Reuters, asking my eager-to-comment audience of business wonks to tell me stories of how big corporations are getting ready.

The idea was that my readers and other bloggers would cheerfully provide me with examples of how companies are preparing for the downsides—not to mention the opportunities—of climate change. I braced myself for the inevitable barrage of responses; what I got was a shocking lack of evidence that the corporate sector is doing much of anything.

Most companies seem to focus solely on mitigating changes to the climate: reducing carbon emissions, improving environmental sustainability, and striving to be an enlightened steward of the planet. Adaptation is the opposite, more pessimistic approach: It is about ensuring survival in the exceedingly likely event that climate change occurs.

The U.S. government is trying to create incentives for businesses and their investors to plan ahead. Newly issued SEC regulations mandate that any material risk connected to climate change has to be revealed, in an attempt to bring these issues out into the open and to allow investors to compare the ways that companies see climate risks and adapt their strategies accordingly.

There are, to be sure, a few examples of corporations that are treating climate change as an ominous reality, or even as an opportunity. The biggest funders of Brazilian agricultural projects, state-owned banks BNDES and Banco do Brasil, are looking carefully at whether it makes sense to support projects that might not be viable in 20 or 30 years' time. Agribusiness giants like Cargill and Monsanto are developing hardier crops, global shipping firms are planning for an ice-free Arctic passage, and power company TransAlta has scrapped potential new plants in the American West because it couldn't ensure that water rights would be available for the next 40 years.

But those are at the margins. In the mainstream business world, climate-change adaptation strategies are scant. The reasons for inaction are sometimes simple, but also counter-intuitively complex.

Start with the superficial: Adaptation strategies have essentially zero PR value. They have nothing to do with saving the planet. Instead, they're all about trying to thrive if and when the planet starts to fall apart. That's not something any savvy company wants to trumpet to the world.

Then there is the mismatch of time horizons. Climate change takes place over decades, and corporate timescales generally max out in the five-to-seven-year range. Businesses typically won't spend significant money planning beyond that period, especially because the effects on business models and future profitability are so difficult to predict.

It's easy to talk about how hotel companies with coastal property might have to face more hurricanes or rising sea levels. But it's quite hard to know what is going to happen to any given beachfront resort with a sufficiently high degree of certainty. Given the enormous amount of variability in any complex model, if a company spent a lot of money carefully mitigating the risk of X, it could end up getting blindsided by Y instead.

"There are very difficult models to develop, with more rain here, less rain there," says Andy Hoffman, associate director of the Erb Institute for Global Sustainable Enterprise at the University of Michigan.

Finally, even if the effects of climate change are foreseeable, they can be impossible to hedge.

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