The earth's atmosphere contains greenhouse gases (GHGs), and their ability to trap heat within the atmosphere is responsible for the ambient temperatures under which communities and economies have developed the last few thousands of years. Prior to that there was an ice age. And before that there was again a different climate to the one today. The earth's climate has always undergone some level of change throughout the geological ages. Large-scale climatic changes in the past have been caused by various factors including solar activity (radiation), variations in earth's orbit, volcanic eruptions, and even meteorites that may have caused the extinction of dinosaurs. However, the observed changes happening in our planet the last few decades have been overwhelmingly due to anthropogenic global warming associated with increased concentration of GHG emissions in the atmosphere after the industrial revolution. GHGs such as carbon dioxide and methane cause extra heat to be trapped and retained on earth (a greenhouse effect) that would have been otherwise deflected back into space. Human activities are estimated to have caused approximately 1.0 °C of global warming above pre-industrial levels, and global warming is likely to exceed 1.5 °C between 2030 and 2052 if it continues to increase at the current rate [1].

Even an apparently small increase of 1.5 °C can affect atmospheric circulation, and small variations in average conditions can have a big influence on weather extremes such as droughts, floods, and hurricanes, as have been witnessed around the world over the last decade and also cause dramatic large-scale climate shifts in the long term. Climate change poses significant risks to health, livelihood, food security, water supply, human security, and economic growth.

Furthermore, it poses complex challenges because of the uncertainty associated with the exact timing, magnitude of projected changes, and the interconnectedness between risks and impacts in the modern globalized economy.

INTERCONNECTEDNESS OF CLIMATE RISKS IN A GLOBALIZED WORLD

In a globalized world, everything is becoming more connected including risks from climate change. Take, for example, the agriculture sector that is being impacted by persistent extreme weather such as flooding and droughts. Failure to adapt to such events can cause food shortage and water supply crises and subsequently increase the risk for other events such as conflict and unmanaged migration. Researchers have shown that an extreme drought in Syria between 2006 and 2009, the worst in the country in modern times, was most likely due to climate change, and the drought was a contributing factor in the violent uprising that began there in 2011 with all the domino effects that have caused in the Middle East region and even to Europe in the large-scale migration of Syrians [2]. When risk interconnectedness is “unpacked,” it becomes evident that there is a lot more at stake than just what is obvious.

Furthermore, as business becomes more globalized, interconnected, and interdependent, both vertically (throughout the value chain) and horizontally (companies among same sector), this can further exacerbate business risks. One of the best examples to showcase this domino effect was the 2011 floods in Thailand, which caused a number of computer hard disk (HD) drive manufacturers to shut down. Aside from businesses like Western Digital and other HD manufacturers who were directly impacted by flooding, the domino effects of this incident resulted in a global shortage of HD drives impacting the sector's customers (the computer manufacturer Hewlett Packard lost approximately US$2 billion) and employees (NEC slashed 10,000 jobs worldwide amid performance fears of its platform business that was hit due to flooding), all the way down to consumer and business level (adding US$5–10 to the cost of each hard drive and ultimately computers) [3].

One way to analyze these interconnected risks and opportunities is by taking systems thinking approach (see Chapter 7). Systems thinking is a “dynamic thinking” approach, which promotes the understanding of risks and their boundaries within a system, how they influence one another over time and space, and what patterns emerge and manifest within a value-generating system. It encourages one to “push back” from events and points in time to see the pattern of which they are a part. The assumption is that one will be capable of dealing with a dynamic, rather than only a static, view of reality and thus manage risks better.

Interconnected risks and systems are usually beyond one company's capacity to influence or control, but systems thinking combined with approaches like scenario planning offers management a means to entertain possibilities and attempt to both strengthen resilience and reduce the impact cost where this is needed.

LARGE-SCALE CLIMATIC SHIFTS

The risks from long-term climate change are not as easy to identify as those from extreme weather events because they are not one of big memorable events but can cause whole system shifts, that is, disrupt the sensitive equilibrium of the earth's biosphere with incalculable consequences. There is an anecdote about boiling a frog, which is useful in explaining our collective fundamental difficulty in reacting to significant changes that occur gradually. As the explanation goes, when a frog is placed in a pot of boiling water, it quickly jumps out of harm's way. However, when the frog is placed in a pot of water at room temperature and the temperature is slowly turned up over time, the frog adjusts its body temperature and by the time the temperature becomes deadly, it is too late for the frog to escape. Jumping into boiling water can be compared with experiencing extreme weather events—generally easy to detect and relatively easy to enhance resilience. On the other hand, the impact of incremental changes in temperature is not necessarily easy to identify, and it is important to think about how long-term climate change might affect us before getting too comfortable in the water and becoming less attuned to the changes taking place gradually.

In this context, forward-thinking businesses are beginning to identify their exposure not only to extreme events but also to gradual climate change. They are looking to understand the financial implications, enhance the resilience of their operations, and readjust their core business strategy going forward. Such companies already identify innovative advantage and competitive edge through adopting strategies, which provide solutions to real problems posed by climate change, in the same way that digital technology has been the driver for consumer growth in the last decade. For example, companies are already moving to take advantage of significant market opportunities that exist in providing solutions to water scarcity (e.g., desalination, water efficiency, water distribution, manufacture of pipes/pumps, wastewater treatment projects, and irrigation projects) to key industries such as power, steel, pulp and paper, and cement. Traditional risk management techniques can help manage and adapt to the operational risks amplified by the changes in the frequency and severity of extreme weather events.

Long-term climate changes tend to be systemic, that is, influence many parts of the environmental, business, and societal systems with a wide web of impact connections and can bring risks and opportunities of a different scale. Resilience to risks or positioning to enhance opportunities can be built by taking a more holistic systemic and scenario planning approach to managing climate change and enhancing traditional risk management approaches.

BUILDING RESILIENCE

In order to understand the impacts of climate change and build resilience, it is first necessary to appreciate both the biophysical impacts of altered weather patterns and the operational, social, and institutional implications of these changes. Climate change impacts are seldom discrete as described in the case study below.

CASE STUDY: MINING COMPANY

A mining company operating in a water-stressed South American Country pumps water from a desalination plant at the coast to the mine in the mountains. Changes in precipitation could cause landslides and compromise the integrity of the water pipeline. To secure water supply, the site applies for and secures a temporary groundwater abstraction license. This source is already under pressure due to historical water stress conditions, and this is exacerbated by reduced groundwater recharge from rainwater due to changing precipitation patterns—the cause of the problem from the start. Abstraction of groundwater for industrial use at the mine further exacerbates drought in the area and has unintended and unforeseen impacts on local ecosystems and farming activities, erodes local community support, and seriously jeopardizes the project's license to operate.

Business leaders are becoming increasingly more adept at thinking commercially about the system within which they are operating. What this means is framing the systems boundary, identifying the critical interacting elements in the “business system” and how they relate with and affect each other, and keeping the big picture in mind without reducing it down to its component parts in such a way that ignores the interconnectedness. A key aspect to all this is the ability to see relationships between components where once they might have only seen individual parts and to be able to identify the critical relationships that cause the significant positive or negative impacts. It also means being able to look at problem situations and knowing how to resolve them from a variety of points of view and using different system approaches in combination. This approach encourages a kind of creativity to managing a problem. A certain tolerance to messiness, uncertainty, and ambiguity is needed in order to avoid jumping to solutions too quickly. Spending time in ambiguity and confusion tends to lead to more elegant, resourceful, and effective responses. Mapping systems and identifying, understanding, and mitigating potential risks early give business leaders the opportunity to refashion their operations, reposition their products and services, and ensure an increasingly sustainable market position.

CASE STUDY: EXTRACTIVES SECTOR PARTNERS WITH GOVERNMENT AND COMMUNITIES TO FIGHT MALARIA IN MOZAMBIQUE

Changing temperatures and precipitation patterns can present increased health risks with knock-on effects on the extractives sector. Climate change could cause shifts in disease distribution, for example, in areas at risk of malaria [4]. BHP Billiton's Mozal aluminum smelter operation in Southern Mozambique is increasingly threatened by endemic malaria. The disease affected the facility's performance through absenteeism and low staff morale. Moreover, Mozal became an unattractive destination for skilled employees. The company realized that limiting malaria programs to the Mozal site itself by spraying its facilities and controlling nearby breeding areas would have little effect. Hence, it became a partner in the Lubombo Spatial Development Initiative (LSDI), a tripartite governmental program to develop the Lubombo region and decrease malaria prevalence. Within the LSDI, BHP Billiton was more capable of implementing an effective malaria control program in the area around its Mozal operations. BHP Billiton's partnership with the LSDI and actions taken to decrease the prevalence of malaria among employees have improved the company's productivity and supported the health of the community.

Climate risk management can be embedded within a systems approach to scenario planning and organizational management aimed at enhancing the resilience and, therefore, profitability of companies in the face of climate change. Scenario planning recognizes that many factors may combine in complex ways to create future scenario stories both plausible and surprising. Scenarios that take into account climate change and how it might interact with other risk drivers that are not necessarily solely climate-related can be extremely useful, for example, scenarios that take into account for social, political, economic, and regulatory issues relating to water scarcity, temperature rise, etc.

THE STRATEGY DEVELOPMENT PROCESS

The aim of an adaptation strategy is to move toward embedding a systematic approach to climate risk and adaptation into business practices. How an organization chooses to do this depends on the nature of the risks identified, the business case for adaptation, and the company values/ambitions. An adaptation strategy will provide clarity and direction for the steps to address climate risks and opportunities.

The strategy development, as it relates to climate change, involves the exploration of answers to questions such as the following:

• Where are we as a business today?
• Where do we want to be in X years?
• What are the key climate change issues that our business (or project) strategy needs to address now and in the future?
• What capacities do we need to build and how can we best position ourselves to take effective action?

When developing a strategy, it is critical to “get the whole system in the room” in order to understand it, engage with it, and see how and where it is relevant for the organization. Rather than seeing strategic planning as the preserve of the “numbers people,” collaborative tools for strategy making become essential here in order to bring together all those affected within the system and on the systems boundaries, and to engage them in understanding the nature of the situation and its implications.

Data and analysis come to the process as inputs, but the key is bringing together different functional disciplines, stakeholders, and generations in a collaborative process to interpret the issues through multiple lenses and to obtain the deepest insights and uncover solutions to which all players can commit.

The strategy that is developed then not only is a strategy for the company adapting to climate change but also impacts the broader business environment and system in which the company exists. It recognizes interdependencies between players, climate, and time and puts a value to these.

Finally, the strategy looks to ensure that the organization maximizes opportunities and enhances resilience in the short, medium, and long-term depending on the nature of the impacts with which it is dealing. This will help ensure that future expenditure and planning take place with an “adaptation lens” and that consideration of climate risk and adaptation is fully integrated within business processes.

Developing an adaptation strategy this way requires leaders and managers to have a level of fluency in systems thinking or the willingness to acquire this mindset and associated skills. The mindset and skills can be seen as a distinct portfolio of:

• Recognizing systems boundaries, perceiving interdependencies in and between actors, and going deep, not working with mere effects but with systemic route causes
• Appreciating the dynamics that underpin complex systems and accepting that building resilience to climate change will involve a large amount of complexity, ambiguity, and uncertainty that we need to learn how to be comfortable
• Seeking out the points of greatest influence and leverage within a system and designing and implementing interventions at these points
• Staying alert to the unintended, as well as the intended consequences, and responding to these in a way that optimizes outcomes.

This portfolio can enlarge the traditional expectations of business leaders around vision and strategy, planning, and execution. It can enable leaders to navigate more effectively through increasingly volatile, uncertain, complex, and ambiguous times and find the right path to address the significant problems that face, not only their business but also their broader communities and the earth. Using the systems approach as a leadership practice as well as a tool to understand how climate change might influence the relationships within the business system is the key element of the strategy making process and will be what ensure its implementation and sustainability. So, a company should seek out that its future managers and leaders participate in the strategy development process, because it is these individuals who need to:

• Own it, be committed to it, and take it forward
• Understand the climate-related risks and opportunities from a systems perspective, such that this becomes integrated into their way of understanding the business context in which they are operating and that they act from this standpoint
• Develop and deepen relationships with other stakeholders and build the reservoirs of trust that ensure effectiveness. Trust is the glue that ensures that when unforeseen things happen, stakeholders draw together, rather than pull apart, and find the right path forward together.

REFERENCES

1. 1.  IPCC. Summary for policymakers. In: Masson-Delmotte V, Zhai P, Pörtner H-O, Roberts D, Skea J, Shukla PR, Pirani A, Moufouma-Okia W, Péan C, Pidcock R, Connors S, Matthews JBR, Chen Y, Zhou X, Gomis MI, Lonnoy E, Maycock MT, and Waterfield T, editors. Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty. Geneva, Switzerland: World Meteorological Organization; 2018. p. 32.
2. 2.  Kelley CP, Mohtadi S, Cane MA, Seager R, and Kushnir Y. Climate change in the Fertile Crescent and implications of the recent Syrian drought, Proceedings of the National Academy of Sciences of the United States of America 2015; 112(11):3241-3246; first published March 2, 2015 https://doi.org/10.1073/pnas.1421533112.
3. 3.  Associated Press Thai Flooding Impact on Tech Companies, Suppliers, Associated Press; 2012. Available at https://finance.yahoo.com/news/Thai-flooding-impact-tech-apf-672914039.html. Accessed 2019 Nov 6
4. 4.  UNFCCC. 2013. Private Sector Initiative actions on adaptation. https://unfccc.int/topics/resilience/resources/psi-database.