The winner takes it all

...only there won't be any winners

A few weeks ago, I posted on LinkedIn that a wildfire was on the mountain behind my house. Ultimately, the fire burned for three days, fueled by intense drought conditions in Pennsylvania, consuming around 600 acres. While it was no massive wildfire, it still struck very close to home.

Last week, I was on business travel to the greater Seattle area in Washington state. After the first workday there on Tuesday, a bomb cyclone hit, causing power outages for about 600,000 residents and businesses. Unfortunately, a few of us were staying in a hotel without power. While the camaraderie was high, we were exhausted. By the time I left Thursday night, power still hadn’t been restored.

I am lucky to live in a country with many readily available amenities. Yet, having no power for two days and finding myself 2500 miles from home brought little comfort or consolation.

Still, I was able to catch my flight out on Thursday evening, and the area continues to recover. But, it brings something to the forefront that companies overlook time and again - climate risk.

TCFD defines two types of climate risk in its Final Report of 2017:

Acute Risk: Acute physical risks refer to those that are event-driven, including increased severity of extreme weather events, such as cyclones, hurricanes, or floods.

Chronic Risk: Chronic physical risks refer to longer-term shifts in climate patterns (e.g., sustained higher temperatures) that may cause sea level rise or chronic heat waves.

The wildfire and bomb cyclone were acute risks and, as such, were managed, but not without significant pain. For the wildfire, it took about 30 local and state fire companies to get the blaze under control. Luckily, there was no property damage, but a local park needs repairs. For the bomb cyclone, it took Puget Sound Energy about six days to restore 98% of power, and two people died.

For a company, these types of acute risks represent a wide range of considerations beyond damage to the physical assets. Last week, people charged their devices in the mall, and I could barely find a place to stay charged, especially overnight. Residents booked up hotels so fast since their homes didn’t have power that I couldn’t get into another hotel room. EV charging stations and gas lines were either offline or had long wait times, and on campus, people brought their families into the office since there was power. Some of our meetings were canceled, and team leaders made the best of what time we had together off script.

While everyone got through it, it was a balance of chaos, life, and work.

In a time of decarbonization, we can’t lose sight of managing our acute climate risks, and the energy transition plays a role in how quickly things will decline. After the bomb cyclone, Forbes published a great article about climate resilience in its wake, which contains this note:

Transmission/distribution issues are neglected in climate discussions, which is unfortunate because, without a reliable way to move electricity, energy decarbonization will be in trouble.

This was the challenge we faced. No matter how green the energy was or wasn’t, it didn’t matter if there wasn’t a way to get it. In the US, we undoubtedly cannot withstand four years of inaction, regardless of the administration’s stance on climate change. Extreme weather doesn’t care about politics, after all.

And it is even worse as climate change doesn’t respect borders or corporate operating structures either.

Chronic climate risks will emerge everywhere, eventually affecting every company and its value chain. With globalization, this is an unavoidable challenge, regardless of where you operate, yet the citizens and governments of the world seem unable to recognize its severity.

This lack of recognition has manifested at the latest COP.

As COP29 wrapped up, Global North countries committed an insignificant sum to invest in Global South countries for climate adaptation and transition. The deal improved the investment amount from $250B to $300B annually through 2035, but it is estimated that $1.3T annually is needed. Per an article in the FT:

Under the deal agreed by almost 200 countries, wealthy nations said they would take the lead in providing “at least” $300bn in climate finance by 2035 to help developing countries cope with climate change. 

This funding is proactive and targets climate resilience and the energy transition. Keep in mind that COP28 saw an agreement on Loss and Damage funding, which currently sits at only $720M. The Loss and Damage fund differs and helps areas recover after a climate event.

If you are a supplier in the Global South, the question you should be asking yourself right now is this:
Should I report my emissions to downstream B2B customers or find ways to adapt to acute and chronic climate risks?

Well, like an aging electrical infrastructure, if you fall over due to a crisis, reporting carbon emissions isn’t going to matter.

So, here’s where we are. End to end, whether your company operates in the Global North or South, acute and chronic risks will be underfunded, receive little proactive attention, and likely continue to cause disruption that will eventually shift how companies operate or impact them even more significantly than they do today.

We are entering a new era of dangerous climate, misunderstanding, and inertia. Due to the increasing magnitude of these issues, supply chains won't recover quickly going forward, and companies won't be able to lean on insurers as a safety net.

But before I end on that bleak note, there is a chance some will get this right; there won’t be winners in this fight, only those that survive with minimal disruption and those that undergo massive pain. This will involve an unprecedented collaboration between the public and private sector, peer group companies and financial services firms, and the value chain. No one entity can go after these systemic challenges in a silo, and we will need systemic approaches.

Consider the massive interconnected risks during the 2008 financial crisis. We now appear to be entering an era of similarly impactful climate risk. If you are still trying to figure out your ESG metrics and have ignored climate risk, it is time for strategy. I’ve written robust disaster recovery plans for technology stacks before. This isn’t that. I’m suggesting a comprehensive plan covering your relationships in the value chain, physical assets, and stakeholders.

All parts must work together in a climate crisis, and there is no guarantee that issues in other areas won’t compound localized issues. From a financing and attention perspective, this means adapting, mitigating, transitioning, and reacting, but you must start planning first!

Anything less will require a herculean scale of firefighting that your company will not be ready for reactively.