Risk Mismanagement

Slate (04/19/10); Salmon, Felix

Not all companies are taking proper steps to prepare for – and adapt to – the future effects of climate change. Many firms 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 some corporations that are treating climate change as an ominous reality, or even as an opportunity. 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 in the mainstream business world, climate-change adaptation strategies are scant. 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. Executives should try to imagine their companies 30 years down the line, struggling with the deleterious effects of climate change on profitability and corporate survival.

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