Every company is at risk from climate change. This risk is relevant to all industries and will affect the financial performances of companies across the board. This is not only in a few industries that might immediately come to mind, such as energy or real estate.
Climate change-induced natural disasters may have a detrimental effect on the daily operations and production cycles of companies in a variety of sectors and industries. Logistics companies’ operations are fully dependent on infrastructure. It is clear that their operations suffer if ports and roads are impaired by rising sea levels or are not accessible because of storms. The 2010 volcanic eruption in Iceland and the 2011 tsunami in Japan highlighted the vulnerabilities in the modern global supply chain of many companies from electronics to the automotive industry that outsource their manufacturing around the world. While Japanese plants remained closed, international companies like Ford Motors, for example, suffered from production disruptions due to insufficient supplies of their Japanese-made parts.
Climate change may impact the financial performances of companies by increasing the cost of doing business, whether it is in the form of increased price for electricity or water treatment, or the costs of infrastructure repair. At first glance, IT companies’ vulnerabilities to climate change risk may not be obvious. Yet, these companies rely on large quantities of water to cool their servers and have a high demand for electricity to run their data centers. As the climate continues to change, both of these are commodities that will be potentially more difficult and more expensive to procure.
To reduce the impact of climate change on financial performance, companies’ risk mitigation strategies should address climate change risk. One way is to incorporate climate adaptation strategies into daily operations and focus on both technological and behavioral changes. By taking a risk management approach, companies can mitigate the numerous risks posed by climate change and continue to venture in the future. Companies that fail to adapt will be eclipsed by their competition.
Many in the U.S. took sides on whether U.S. President should approve a 3,400-mile pipeline that will bring crude oil extracted from the Canadian tar sands to the Gulf of Mexico refineries. Last week, it seemed that the proposed project came closer to approval, after the U.S. State Department came out with a detailed 2,000 page analysis that found that the construction of Keystone XL is unlikely to have a significant environmental impact. The report's findings re-focused public attention on the issue.
Those who oppose the approval of the pipeline have many arguments at their disposal. The pipeline, which will pass through several American states, is believed by many to result in environmental degradation while also causing the release of tons of carbon into the air. Besides the environmental risks, they point at the findings that this project will not result in significant job creation. Despite TransCanada's study commissioned in 2010 illustrating that Keystone XL will help create hundreds of thousands of jobs, the recent Department of State's findings show that about 4,000 temporary construction jobs and only 35 permanent jobs will be created. The energy security argument has been weakened by the steadily increasing oil production in the country and lower oil prices. The focus is now on the current administration's commitment to the clean energy future and to combating climate change. Domestically and abroad, many believe that the rejection of Keystone XL is important because it will send a clear message that the United States is serious about climate change.
Whether or not the pipeline project is approved in the U.S., the Canadian tar sands industry will continue to expand its operations and export opportunities. Canadian energy companies are already looking for ways to diversity and have proposed pipelines to other markets. For instance, Chinese companies have invested billions of dollars in the Canadian tar sands industry with exports to Asia in mind. At the same time, Canada has been working on improving its energy industry's image and demonstrating its commitment to environmental responsibility. From 1990 to 2010, Canadian energy industry's greenhouse gas emissions per barrel of oil sands crude decreased by 26%. The industry has also improved its clean up and water use methods.
Tar sands will continue to be developed. If not to the U.S., crude from tar sands will be exported elsewhere around the world. The current debate over the project can be seen as a matter of balancing environmental and economic concerns in the United States. Whether the final decision will be based on practical or more symbolic reasons remains to be seen.