Climate risk management: a tipping point to celebrate
Adaptation ESG: a corporate movement to launch
Wow. What a difference a year makes. Not even a year, actually. It was last April when I wrote this column announcing the upcoming launch of a movement, which I called Adaptation ESG, to urge sustainable companies — bellwethers in Environmental, Social & Governance standards — to lead a new renaissance of resilience in the face of the latest and ever more daunting climate science. To extend their sustainability leadership, as it were, to adaptability leadership.
The world’s booming $35 trillion ESG investment market, roughly 40% of total global assets under management, had begun sending the clearest possible message to companies everywhere: if you want our capital, disclose your climate risks, mainly through TCFD, the Task Force on Climate-related Financial Disclosures.
But few companies had bought in, so I figured a campaign was needed to shake up the market and awaken interest. In a nutshell, we’d approach sustainability leaders, interest them in adding adaptation to their ESG action portfolio, and stir rapid and widespread global contagion on the practice.
Fast forward to October, when TCFD reported a dramatic rise in membership. And November, when the United Kingdom announced it will mandate TCFD compliance. And December, when the newly named climate team of the incoming Biden Administration signaled the United States will likely follow suit. And the game changed.
It is only a matter of time, not long at all, before other countries, certainly the world’s largest economies and trade blocs, do the same. The regulatory shoe has dropped. TCFD is about to become a requirement, scaling climate risk management to levels we in the corporate-adaptation community have been dreaming about for years.
So that’s two game-changing trends we’re celebrating: pressure from ESG investors and mandates from government. At least two others are driving the market:
- Deepening concern over the fast-worsening climate risks businesses face from record-setting fires, storms, heat waves, droughts, Arctic melt, pandemics, more. Moody’s just came out with this report saying a whopping $7.3 trillion in corporate finance is at high risk of delinquency from extreme climate events. Last year, the U.S. alone was battered by an unprecedented 20 natural disasters carrying a price tag of more than $1 billion each, the sixth straight year over 10. Globally, insurers are feeling the pinch.
- The huge opportunities it’s all creating for a wave of new adaptation innovations and solutions to help the world manage this historic transformation — what Judith Rodin, former Rockefeller Foundation president, called the Resilience Dividend in her book by that name. So dramatically different will the future be from the past we know and the present we master, that it must be invented practically from scratch, leading Forbes to call adaptation “the greatest entrepreneurial challenge of our time.” Bill Gates’ Global Commission on Adaptation, for its part, published this late 2019 report pointing to $7.1 trillion in savings and other gains this decade alone from resilience measures, and that only covered a few functional areas.
This booming activity is mostly referred to as Climate Risk, or the first bullet above. But the Opportunities Development in the second bullet is no less attention and investment deserving. To its credit, TCFD covers both, but a quick glance at most events hosted by news media and trade groups, as well as solutions offered by adaptation providers, reveals Climate Risk as pulling in more interest.
Whether risks, opportunities or both, the whole thrust promises to come together, for the first time, in the annum just begun, making 2021 a tipping-point year — truly the start of the Resilience Decade, to borrow the phrase coined by Joyce Coffee, the Chicago-based leader and pioneer in the field. She authored this story — and Carolyn Kousky this one — strategizing how the Biden team can catapult the trend.
Whatever you do, don’t fall short
But as swiftly as this policy point is tipping, the response will surely not go far enough, given how rapidly climate tipping points are escalating the crisis and the raw number of people, places and organizations that must adapt fully, on time, in every corner of the planet.
Unless more is done to boost resilience. That’s where Adaptation ESG reenters the scene.
Writer’s Note: Adaptation ESG underwent a more exciting reinvention several weeks after this article was published, to make it more expansive and go beyond the ESG marketplace. Adaptation Ambition, as it is now called, will target the broader business community. The broad strokes of Adaptation ESG, however, still apply, roughly as explained below. For more, visit commonfuture.world.
Just like multiple movements arose in the 1990s — alas, still are! — to accelerate sustainability even after it had achieved significant traction, so too must we do with adaptability in the world’s current existential predicament, to achieve the fastest possible global scale.
That’s why we’ve decided to redirect Adaptation ESG. Instead of, or in addition to, raising TCFD awareness among companies, the movement now seeks to fill no fewer than five big gaps that remain unattended in today’s sudden and exciting dive into resilience by the world’s largest corporations:
1. Private companies, not just public
The investment firms powering TCFD are, naturally, focused on publicly traded companies. Adaptation ESG will, as well, but not at the exclusion of the privately held. Every company everywhere must adapt. Indeed, communities depend greatly on local private players for their resilience.
2. Small and middle market, not just large cap
Those local, regional players, whether public or private, are more often than not small- and mid-size. Our pledge is to leave no company behind — all sizes, industries and locations. The ESG focus is simply a strategic start, not an exclusionary screen, because ESG leaders are ready, today, to jump into adaptation, make a big fast difference and trigger greater scale. So we aim to work first with them — with you! — to get the ball rolling. And as all companies wake up and use the movement’s tools, perhaps they, too, will embrace ESG practices and transform, not just adapt.
3. Adaptation, not just mitigation
The point cannot be repeated enough, given the still widespread and damaging confusion. Far too many media stories equate adaptation with mitigation, saying the way to adapt is to solve the crisis, and the way to do that is to step up commitment ambition toward reduced carbon and long-term systemic transitions toward a “better, sustainable world.” Or they give you the Big If—temperatures will rise undeterred “if we don’t decarbonize more.”
The omission, though largely unintentional, could not be greater, or riskier, for no amount of decarbonization exempts humanity and business from the exponentially catastrophic climate spiral we’re already on. And the science tells us unequivocally those systemic transitions can no longer happen on time. Collapse will happen much sooner, starting as early as this very decade.
Even Paris Agreement organizers acknowledge, informed by numerous peer-reviewed studies, that a 4° Celsius temperature rise is already baked in, to occur before century’s end, which makes a 1.5°C and 2°C temperature rise no longer avoidable in the near term. I explored that scenario in my last column, including pathways to a new kind of hope in the face of it.
The eventual outcome might in fact end up lighter. But that’s not probable, given the economic and political trends keeping commitment ambition in check. Since you as a corporate manager must go on the probable and not the miracle, this is the future you must prepare for and adapt to, starting now, even as you keep the pedal to the metal on all mitigation and decarbonization fronts.
4. Execution, not just disclosure
By all means, get into TCFD — and SASB and PRI and CSA and the other standards — and disclose. But remember this is ultimately about actually adapting to worst-case climate change. Stopping at disclosure and preparing for anything less than worst case falls dangerously short and keeps you frighteningly exposed.
5. Go deep, don’t stay in the shallow
Going deep, essentially, means two things. First, go long — as deep into the century as models, imagination and analysis can take you, and figure out what the coming climate devastation and societal collapse will mean to your business, and how to ride it to keep your company open and your value high.
It also means going deep in your organization, including as many of your internal and external stakeholders as you can, starting with your employees, communities, partners and suppliers in every business line and location, plus your bankers, insurers, investors and others with whom you’re intertwined and interdependent.
The world’s new corporate leadership opportunity
For all companies, resilience is about to emerge as a brand’s premier path to victory. It is the way to win…big. Call it the new wellspring of corporate value. The logic is as stunningly simple as it is powerful:
As climate impacts compound and economies collapse, the companies best positioned to survive and thrive, to gain the bulk of market share, to attract the customers, employees, investors and insurers, are those that adapt thoroughly for the long haul. Competitors that fail to do so will inevitably fall victim to the consequences and wither.
The principal focus of adaptation professionals thus far has been the public sector — understandably, given the imperative of securing a resilient infrastructure, the most accurate weather forecasts, the best possible emergency management, and equitable services for the most vulnerable.
Now, we add the business side, with an equally compelling social mission. One of the fundamentals of modern, mostly urban life is our high dependence on companies to produce and supply just about everything we need when disaster strikes: food and water, hardware items, clothing, household goods, energy and gasoline, property restoration and reconstruction, banking and insurance, media and entertainment, healthcare, telecommunications and internet, transportation, countless others.
There can be no resilience without them. Without YOU. The time has come for companies to step up. To get ready and protect themselves. To invent the future and launch the goods and services everyone needs. To secure long-term value. Given the speed and scale of the climate crisis, it can’t happen soon enough.