COP 21 : Time to help firms change the climate

cop21

In just over 200 days, France will be hosting the 21st session of the Conference of the Parties to the United Nations Framework Convention on Climate Change. Politicians will try to find solutions to keep global warming under +2°C by the year 2050. The objective is abstract. It is also a long way away. Since there is no “global” government, COP 21 is likely to end with no more than a list of good intentions. Firms however are “global”. What if we approached COP 21 in a different way this time?

In March 2015, the average temperature across global land and ocean surfaces was the highest in the 1880–2015 record, surpassing the previous record of 2010. In fact, the temperature in the first three months of the year was also the highest in the 1880–2015 record, surpassing the previous record of 2002 [1]State of the Climate 2015, http://ncdc.noaa.gov/sotc/. Since 1992 in Rio de Janeiro, conference after conference, politicians and lobbyists have tried to engage economic actors into new ways of working to stabilize the climate.

temp-anomalies

Experts from the Intergovernmental Panel on Climate Change have been working since 1990 to provide politicians with independent and robust arguments to help them in their discussions. Their 2014 report is the fifth after 1990, 1995, 2001 and 2007 reports. It confirms that climate change is unequivocally happening and a lot of the observed changes in weather patterns are unprecedented. The average world temperature is now expected to rise by 4.8°C by the year 2100. The first report stated that climate change was most probably caused by human activities. The degree of confidence was then 50%. Today, IPCC experts are 95% confident that climate change is caused by humans (66% in 2001, 90% in 2007).

The 1997 Kyoto Protocol aimed at capping man-made CO2 emissions at the level of 1990. It was only enforced in 2005 after endless prevarications and compromises, but several countries did not participate, including one of two largest economies in the world. It is therefore not surprising that since 2010, emissions are rising at an even greater pace than in the last decades [2]Rajendra Pauchuri, President of IPCC.

From one conference to the other, the list of laudable intentions aimed at preserving the planet for future generations was not enough to engage economic actors into new behaviours. So people tried to talk about money to see if it was a more powerful argument. In 2006, the Stern report stated that if 1% of GDP was invested every year into alternatives to CO2, it was still possible to stabilize the climate. It also stated that if nothing was done immediately it would cost 5% of GDP every year by 2050 to pay for the consequences of climate change [3]See for instance : https://www.tresor.economie.gouv.fr/file/326872. Nothing changed. Last year, Michael Bloomberg, Henry Paulson and Tom Seyer tasked an economic research firm with an assessment of the financial consequences of climate change in the US. The report evaluated the cost of natural catastrophes to the year 2100 on coastal property and infrastructure, agriculture, and energy [4]Risky Business, The Economic Risks of Climate Change in the United States http://riskybusiness.org/uploads/files/RiskyBusiness_Report_WEB_09_08_14.pdf. Although the report was professionally done and provided very useful information for the insurance and the reinsurance industry, it had again little tangible impact on politicians and economic decision makers.

All three reports (IPCC, Stern, Risky Business) face the same barriers:

  • There is no such thing as “global” government and there are always countries that have an interest in staying away from global initiatives, which renders any global initiative ineffective and void.
  • The time scale of these reports is too far away (2050 to 2100). Politicians’ timeframe ends at the next election; economic actors’ timeframe ends at the following quarter or the next dividends.

Without upsetting anyone, it is fair to say that economics and money are more effective than political ideas in governing the world’s development. The risk that climate change may cause financial losses by the year 2050 or 2100 is real… but far too remote to alter firms’ strategies. Yet, what actor other than a firm is truly global? Global firms are the right interlocutors, but they need to hear a language they can relate to. They need to have information they can integrate and use profitably in a timeframe which makes sense for them and their investors.

There is one element, regularly highlighted by the World Meteorological Organization, which needs to be put forward: with climate change, climate variability rises and continues to rise. Climate variability is the difference between observed weather and its normal seasonal value. IPCC forecasts deal with the evolution of “normal seasonal” in the next decades but give less consideration to the consequences related to the rise in climate variability from now to the year 2100.

What if IPCC scientists focused more on climate variability? What if we changed the way we talk about climate change and economics?

Up till now, assessing the cost of climate change has meant adding the costs to insurers of all catastrophic weather events such as storms or hurricanes [5]2014 Review of natural catastrophes: http://www.munichre.com/en/group/focus/climate-change . The annual cost is viewed as the product of high impact and low frequency events. Yet, climate variability, low impact and high frequency, has also a significant cost to the economy. Day to day changes in temperature, rain, wind or sunshine directly impact 30% of the world GDP and 70% of firms in a wide variety of economic sectors [6]The Weather Business 2014: https://www.allianz.com/v_1385454283000/media/press/document/2484_Allianz_Weather_Risk_LR.pdf [7]La Gestion du Risque Météo en Entreprise, Ed. Revue Banque. In the United States, average climate variability of about 3.5% translates into an annual cost to the economy of 534 billion dollars. This means that climate variability is already more costly to the economy and firms than natural catastrophes. And it only just began.

In France for instance, temperature variability has almost doubled over the last two decades. When twenty years ago a warm winter only cost a few percentage points to energy distributors, apparel retailers, car replacement parts or specialized food processors, today climate variability wipes out sales and profits at a double-digit pace. This is happening worldwide. Climate variability is affecting the economy as a whole and firms in particular every quarter, right now. Not in 2100, not in 2050, but today.

By helping firms understand how climate variability impacts their activity today, we help them consider climate into their daily operational and strategic management decisions. With a clear vision on how much climate affects sales and profits each quarter, each season, each year, firms are progressively implementing hedging instruments and adapting their business to decrease their exposure to climate variability, and therefore climate change.

So if COP21 actors want to achieve more than another list of good intentions, they should create the conditions to enable firms to manage the short-term consequences of climate change on their business. As they all realize that climate variability can cause significant damage to their profits, no doubt that managers will strive to do everything it takes to route more profits to the shareholders rather than losing money every year because of increasing climate volatility.

By engaging with firms to help them contain climate variability, it is climate change that is being addressed. COP 21 actors: it is now time to play on!

References   [ + ]

1. State of the Climate 2015, http://ncdc.noaa.gov/sotc/
2. Rajendra Pauchuri, President of IPCC
3. See for instance : https://www.tresor.economie.gouv.fr/file/326872
4. Risky Business, The Economic Risks of Climate Change in the United States http://riskybusiness.org/uploads/files/RiskyBusiness_Report_WEB_09_08_14.pdf
5. 2014 Review of natural catastrophes: http://www.munichre.com/en/group/focus/climate-change
6. The Weather Business 2014: https://www.allianz.com/v_1385454283000/media/press/document/2484_Allianz_Weather_Risk_LR.pdf
7. La Gestion du Risque Météo en Entreprise, Ed. Revue Banque