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Climate Change – The Urgency Emergency!

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Our first event of 2020 could not have been more topical as our guest speaker, John Scott, Head of Sustainability Risk at Zurich Insurance, challenged our cross-sector audience to consider the very real business consequences of climate change. John is a key contributor to the World Economic Forum Global Risk Report, which underpins the agenda of the Davos meeting.  

Our Head of Risk Tariq Ghadie introduced John with the warning; “We could yet be faced by the prospect of the sixth mass extinction if businesses, consumers and regulators do not work together to shift the paradigms and safeguard our natural resources”.   

As schoolchildren go on strike and Extinction Rebellion brings global capitals to a standstill, the climate emergency has well and truly moved to the centre of public debate. When smoke from the Australian wildfires obscures the sun in New Zealand – more than a thousand miles away and Jakarta is swamped by unprecedented rainfall, the effects of climate change have never been more visible.   

Worldwide economic stress and damage from natural disasters in 2018 totalled US $165 billion – half of which was uninsured. Yet even these catastrophic events do not fully express the extent of environmental risk facing the world today.  

You can’t do business on a dead planet! Biodiversity is intimately inter-linked to climate change and as it changes it puts every ecosystem under stress. 

In late 2019, UN Secretary-General António Guterres, warned that the “point of no return” on climate change is “in sight and hurtling towards us.” Time is fast running out. As the World Economic Forum’s Global Risks Report 2020 puts it; “We have one decade left to confront catastrophic climate threats, including the less visible, but no less significant issue of biodiversity loss.”   

For the first time ever, the World Economic Forum’s top 5 global risks by likelihood, are all related to the environment. However, can we bring the World together to commit to a decade of action with such polarising views as from Christine Lagarde (President, European Central Bank) and Steven Mnuchin (US Secretary of the Treasury)?   

“How does climate change impact on your business and all businesses? After all, you can’t do business on a dead planet!”  

John shared some fascinating insights from the discussions at Davos and addressed the questions;  

  • What’s changed around the climate change topic recently, in particular with regards to climate science and public opinion?  
  • What changes are coming, not only in the environment, but also in the areas of economics, technology, society and geopolitics and how will they affect your business? How will business and governments respond, especially regarding the disclosure of climate change factors that are impacting business? Are you and your Board ready?  

It is the ‘Urgency Emergency’ but is it just a few environmentalists upping the ante or regulators and politicians, with a politically vested interest, wanting to make a point? Maybe it’s a geopolitical thing, where some countries feel they’re either advantaged or disadvantaged by the changes that climate change will bring?   

All of this is against the background of the 2008 credit crisis. The world has a ballooning national debt problem with most countries having more debt now than in 2008. All the measures and policies we put in place never solved the credit crisis, they only managed it. As a consequence, we are living with a number of asset bubbles all over the financial system, inadequately capitalised banks in many regions and high levels of national and personal debt; an overall picture which says the global economy is still very fragile.   

At a time when there is nationalist and populist fervour that has led to a climate of ‘my country first’, we need to solve very complex geo-political, geo-economic and technological problems which require global co-operation. In this environment, it is difficult to solve the global risks we face which need multi-stakeholder action to resolve. We have a battle for supremacy between China and the US, in terms of who is going to be the leading country in the World.   

Since the nuclear age started, at the end of WWII, the concept of two major countries fighting each other in a hot nuclear war has been seen as a devastating event which could decimate the planet. In the absence of the battle-field being a hot war – the space in which to fight these days, has become the technological space. We’re seeing a battle on who can control technology, gather enough data and analyse it in order to pre-empt or control people’s behaviour. In China, for example, the population are given, or conversely, deducted, points to give them a social score. It affects how family and friends interact and affects lifestyles and ‘privileges’ e.g. to be able to travel or buy online. In the West, we may think of this as an infringement of human rights. Our susceptibility in the West to advertising and political media is the closest we get to this overt control of people in the East. So, this is a world that is accelerating and dramatically changing all our businesses and the way we interact with consumers, intermediaries and our supply chains.  

‘The point of no return’ on climate change is ‘in sight and hurtling towards us’ – time is fast running out. 

– UN Secretary-General António Guterres, 2019  

In summary, when we talk about risk, it is against the background of complex geo-political, geo-economic and technological fragilities.  

Environment: The World Economic Risk report this year, based upon a survey of over 1,000 experts from a diverse set of professions, countries and age groups, gives a good picture of people’s perception of global risk. This year for the first time in its 15-year history, the top 5 risks were all environmental; 1) Failure of climate change adaptation and mitigation, 2) Decreasing Biodiversity 3) Access to water 4) Man-made disasters and 5) Natural disasters such as wild fires.  

Lower down the list, but still highly rated in many countries, were technology risks, especially cyberattacks, data fraud or theft and information infrastructure breakdown, which reflect societies’ increasing dependence on technology to function. Surprisingly, existential global risks such as weapons of mass destruction e.g. nuclear weapons and infectious diseases i.e. pandemics, are now rated as less impactful than climate change risk. People have lived under the threat of imminent nuclear holocaust, ever since the Second World War and pandemics, like the current Coronavirus COVID19 outbreak remind people that a truly virulent pandemic such as the 1918 H1N1 Spanish Flu, or something like Ebola with a high mortality rate becoming truly pandemic, would spell disaster in today’s world of easy mobility! The extraordinary thing is that today, in many people’s risk perception, climate change, although a long-term global risk, is a more existential threat to the planet and to human beings, than nuclear weapons.   

Why has climate change become such a big issue recently? People are seeing things such as intense weather events with a regularity that does not feel normal. The huge typhoons in the Philippines, Hurricane Dorian last year in the Bahamas as well as the recent wildfires in California and Australia, are leading to economic effects and even bankruptcies. These are unimaginable events and people are now getting a sense that this is real!   

The reaction of the public, certainly in the West, is now plainer to see – school children striking and employees saying they cannot/will not work for a company or organisations who ignore climate change.   

If what we are seeing is the social pressure, what are the scientists saying? Well, they’re upping the ante as well. Until COP 21: The Paris Agreement in 20151, much of the climate change science was funded by the carbon producing sectors and said this is natural climate variation. Their human influence models and proprietary data backed this up. When the IPCC2 brought together 1,000 climate scientists to review the data in 2015, they reported that climate change was definitely the result of human influence. This created a dramatic shift.   

The Transition Risks whether they be economic, technological or societal are real. Businesses are on the front line and need to build these risks into their strategic plans. 

Since 2015 there have been two major IPCC reports. The first ‘Global Warming of 1.5 Degrees C’ Report – said it’s not about keeping global warming within 2 degrees, dramatic episodic things happen at only 1.5 degrees. It is not just the earth getting gradually warmer but when you warm up the deep oceans or the permafrost, large amounts of methane are released into the atmosphere. Methane is about 30 times more powerful than carbon dioxide in terms of global warming. This sets up feedback loops – polar ice caps and land ice, starts melting faster and the sea levels rise in this chain reaction creating a step change series of events which cannot be reversed.  

The real message of the Global Risk Report is that in all these areas (geo-political, geo-economic, technological) we are reaching a number of tipping points, or windows of opportunity to act. Once these are passed the chances to mitigate these risks either become too expensive, or impossible to put in place. Scientific consensus is that we have 10 years to set about radically shaping how we eliminate the carbon emitting industries to reduce emissions – a decade of resilience. Otherwise it is too late and climate change will accelerate to the point where we go beyond 3-5 degrees of warming. This is when the biosphere switches to become a net emitter of CO2 , global food productivity collapses and many will be living in extreme conditions. Surviving extreme cold or areas of extreme flooding will become so expensive and difficult, if you are not a wealthy country, it won’t be possible. Migration brought on by climate change will bring societal and political pressures as people move to survive.   

The second IPCC report, ‘The Agricultural Forestry and Other Land Use’ Report (AFOLU), says the way we manage the large amount of carbon stored in the forests of the world (tropical and arboreal) and how we use land for agriculture has a big impact on carbon emissions. There is a strong link here with protecting biodiversity and natural infrastructure which have huge benefits in many ways, either as raw materials in many supply chains, sources of insights for human health, production of food, protection of vulnerable coastal areas from storms, or as carbon sinks, such as the soils in tropical forests. Recognising, protecting and managing these vital natural resources requires a huge shift in many industries and consumer behaviours.  

Occurring right now is an “Urgency Emergency” and the message to business people is that we need to build this into our strategic thinking. There are impacts that will happen in shorter timeframes such as 3-5 years and those which are longer term with dramatic shifts resulting in the loss of entire industries within the next 10, 20 and 30 years. This is ‘Transition Risk’.    

If the physical risks are those such as rising sea levels, or changing patterns of severe weather, the Transitional Risks will affect about a dozen major carbon-intensive industry sectors that currently drive the majority of global carbon emissions.   

We have 10 years to set about radically shaping how we eliminate the carbon emitting industries to reduce emissions – a decade of resilience. 

Energy/power production contributes half of all emissions. This is followed by 20% from mobility – not just personal travel, but a significant contribution from supply chain transport i.e. long distance shipping, air, trains. After this, the components which make infrastructure possible are the ‘very hard to decarbonise industries’ – the production of iron, steel, glass and cement. Other major contributors to emissions are the agri-chemical – including agriculture more broadly – and petro-chemical industries producing fuels, plastics, materials for clothes, phones, fertilisers and pharmaceuticals.    

These industries and services are fundamental to every economy around the world and they all need to be done in a very different way in the next ten years, or in a way that reduces the carbon emissions. Economic growth around the world has to be done in a different way, one which does not fuel carbon emissions3. All these sectors and industries are highly interdependent on each other. Even if you decide to switch your fleet to electric vehicles (EVs) for instance, where will the electricity come from? How much coal, nuclear or renewables are used to generate the electricity? What are the emissions patterns from that? Lithium is needed for batteries and they are difficult to dispose of once spent.  

These are long term capital decisions. On a Thermal coal power plant, return on capital investment may take 20-30 years, so there is a very real chance of stranded assets in this and other sectors, either stranded capital, stranded value, or stranded volumes. We’ll need battery plants that use other minerals, such as lithium, nickel, cobalt and electrification of mobility will need large volumes of copper for wiring. How are we going to heat both domestic and commercial buildings in this low-carbon future? To move away from natural gas, we need to look at alternative fuels such as low-carbon hydrogen, or electrical sources of heat, such as air-source or ground-source heat pumps. Either approach is both expensive and disruptive to install. The resulting technological challenges of creating these low-carbon alternative fuels and their supply chains, at attractive economics which encourage consumers to switch, are immense.  

The transition risks are vast no matter what industry sector you are in and need to be thought through from your customers to your suppliers. Some sectors will disappear and are already starting to be unattractive to invest in. For example, a PE firm invested in a software company specialising in control systems for global coal power plants – the investors lost their money as the business could not grow, had no future and its value shrunk.   

The challenges are threefold – Economic, Technological and Societal.  

Technological Challenges – How do you heat an industrial furnace in a low carbon way? There is no other way to make steel, glass or cement other than to find a source of heat. One more environmental friendly option is low carbon hydrogen. The Japanese are, as a nation, going for hydrogen as their main fuel source in order to de-carbonise the country. They are talking to the major fossil fuel suppliers in order to source methane, either from natural gas, or from coal bed methane for ‘Steam-methane reforming’ – in the presence of heat, steam and methane will produce hydrogen and carbon dioxide. This is existing technology, which produces significant carbon emissions – so called “grey” hydrogen. An alternative is to capture the CO2 produced in this process and store it safely, deep underground – known as “blue” hydrogen. Carbon capture, use and storage systems have high initial capital costs and require public-private funding structures, similar to those used in infrastructure like flood barriers to create revenue streams that fund the investment.  

The Swedish steel industry has demonstrated low carbon steel production using low-carbon hydrogen produced using off-peak renewable energy from hydropower to electrolyse sea water – otherwise known as “green” hydrogen. The challenge is that not all countries that produce steel are blessed with such renewable energy resources as abundant hydropower, so we should expect to see different approaches in different countries to developing either green or blue hydrogen supply chains, or going down the route of electrification. Whatever the outcome, there will be winners and losers in terms of these industry changes.   

Economic Challenges: In economics, politicians will need to create new incentives to encourage clean technology and market innovation to fuel new, low carbon drivers of economic growth and change consumer behaviour. One important approach will be to implement carbon pricing, either as a levy, or tax, or border tariffs. The big debate that failed at the last COP 25 (Conference of Parties) meeting in Madrid in 2019 and will be debated in Glasgow COP 26 this year, is the “Article 6” rule book for carbon trading. These new rules will create the opportunity for carbon-trading, but will also create burdens – essentially tariffs on goods coming into a country based on whether they’re produced in a carbon intensive way and will increase prices for consumers and costs for companies in many areas. Politicians in many regions and countries are no examining ways to manage these economic policies that both change behaviours, achieve low carbon transitions, but that are also politically acceptable, for example the concept of the “New Green Deal” – where revenue raised by carbon taxes are disbursed back to tax-payers as a low-carbon dividend.  

Societal Challenges: Given these economic, political and technological changes, the impact on people in their day-to-day lives will be significant and the societal, or so-called “just” transition is not to be under-estimated. We already saw over the last thirty years how the forces of globalisation affected many regions and communities in developed economies, often with large numbers of people becoming unemployed, often for multiple generations. What, for example will happen to the communities and people who work in the economies built on coal such as in Poland and Eastern Germany, or the Czech Republic? The risk is a political, or societal backlash that delays or even stops the transition and could be fertile ground for nationalist and populist political policies. De-industrialisation since the 1970s has left many European regions with lasting socio-economic problems in regions with reliance on coal, steel and other industrial sectors. The key is to ensure that the next wave of de-carbonisation is designed in a smarter way that doesn’t lead to these outcomes.  

How to make the transition quickly, effectively and equitably to a prosperous, resilient and zero-carbon economy is an existential challenge for both investors and workers. Climate change certainly started as an environmental threat. But the transition required is a process of far-reaching structural economic, technological and social change. For workers, the transition raises profound issues around the quantity and quality of jobs, social dialogue in the workplace (between employers, unions and workers), health and safety, as well as the fate of whole communities. As part of this, we need to ensure that workers and communities in fossil fuel-dependent economies and sectors have a pathway to prosperity.   

The Transition Risks whether they be economic, technological or societal are real. Businesses are on the front line and need to build these risks into their short, medium and long term strategic plans.   

These transition risks are major factors which will shape our future. Exacerbating the risks we have already talked about, is another one – Biodiversity. Major catastrophes on Earth which cause mass extinction events are not new but since humans have been around, we have managed to wipe out 70% of all mammals and 50% of plants! Surprisingly, as a result, we have a relatively narrow range of choices of plant or animal protein. Furthermore, if there is an animal borne pandemic such as swine ‘flu in pigs or avian ‘flu in poultry, which wipes out the pig and poultry population, then the impact on humans would be devastating.  

This vulnerability in our food supply chain is mirrored in other industry’s supply chains where the source or supply of natural materials is equally vulnerable. These examples need to be factored into an organisation’s longer term strategic plans and included in their overall risk assessments.  

When we lose biodiversity and whole species, we lose scientific insights and breakthroughs. The Axolotl is in danger of extinction. It is an amphibious Salamander used extensively in research because it can regenerate its limbs and is therefore a ‘model organism’ for the development of limbs in vertebrates. There are other plant and animal species not even discovered yet which could help in the fight against cancer. Many could be extinct before we discover them.   

“Urgency Emergency” – we need to build this into our strategic thinking. 

You can’t do business on a dead planet! Biodiversity is intimately inter-linked to climate change and as it changes it puts every ecosystem under stress.  

Conclusion: In business, we must think about governance processes in our organisation from board level to front line to mitigate the risks. What does climate change mean for our businesses and our sector? What do we need to change? How do you succeed in this context? It can’t just be about declining business on an ethical decision, it’s also about being commercially successful and making money. For example, Unilever as part of its Sustainable Living Plan, re-purposed ‘Lifebuoy Soap’, an antiseptic soap created in the Victorian times and one of the original products of the Lever Brothers Port Sunlight works, as a product for emerging economies. It was re-launched in Africa in 2010 with the aim, to reduce child mortality by changing the hygiene behaviour of 1 billion consumers across Asia, Africa and Latin America, with a “High 5 for handwashing” campaign. When the FT reported the launch as ‘Unilever to clean up in Africa’ far from being concerned about being seen as rapacious, the Unilever leadership felt that the launch was a great example of the Sustainable Living Plan in action. So it’s not just about declining business on ethical criteria – it’s about re-purposing your core business from a sustainability perspective and thinking about how to make it more successful. Consider what will your sector look like in 10 years, given the risks and opportunities associated with climate change. Make it real and engage your employees in the purpose..   

Litigation Risks Associated with Climate Change: As the Tobacco industry faced litigation before so will certain businesses and sectors when it comes to climate change. The causes and effects still have the lines to be drawn between them in terms of the links to climate change, so whilst legal proof has not yet been reached, it’s coming. When it does, it will be an enormous strain on balance sheets as litigation cases pay out.   

Businesses will need to disclose the risks to its business model when it comes to climate change over the next 15-20 years. Scenario modelling of this type is very difficult to do. Yet, build models you must. In the building of these models, business must think about how it is set up for these kinds of risk, how they are built into the strategy and where can money be made?    

There followed a short Q&A session:  

Q  Patrick Butcher, Group CFO, Capita Group Plc; Regarding the Japanese approach to hydrogen, their culture is very much about the ‘whole’ where the West is about the ‘individual’. How do we change Western society as a whole to begin to create a social force that allows us to act in a conscious way as you described in Japan?  

A  It’s clear that the oil and gas companies get it now and are wrestling with the idea of what strategy they will take going forward. The rational argument may say that even in a + 1.5 degree increase world, there will still be oil and gas used but in different proportions and geographies around the world. The big producers wonder who will win or lose and which strategy they should take. There will be competition and that’s driven by societal expectations that determines a “licence to operate”. Then there is the economic climate versus the big decisions politicians must be brave enough to take. We saw with the “gilet jaune” protests in France in 2018 how the consequences of even a minor change in policy affects the money in people’s pockets and their ability to live their lives. The extra taxes on certain fuels were so unpopular, very much so as they disproportionately affected those who live in rural areas dependant on cars and oil for heating, they were reversed. As societies we need to take deliberate action to limit emissions but think hard about how we subsidise this to manage social consequences. In the West we also look to Technology. As Bill Gates said, ‘this isn’t all about divestment and getting out of things, it’s about investment in technologies that will dramatically change the carbon emissions profile of all of these services.   

Q  Juergen HeilmannInvestcorpI’m interested to hear your view on the media phenomena such as Greta and the like. Do you think it helps because it creates awareness and pushes the subject forward or is it counter-productive because it creates another divide in society?  

A  My personal view is that it is a good thing to raise this topic, whoever raises it, and it is now at the forefront of all our minds, informing discussions with our children at home and around the boardroom table. We wouldn’t be having this same level of discussion 10 years ago and in the last 2 years, the school strike movement, Extinction Rebellion and David Attenborough’s documentaries have led to a much greater awareness of environmental issues, the urgency to act and have even led to practical actions to get rid of single use plastics. At Zurich we have removed single use plastics in our canteens and we’ve significantly reduced our use of paper for printing, removing many multi-functional printing devices, replacing printed documents with electronic documents viewed on meeting room monitors or tablet computers and the cost reduction has been dramatic.   

For most businesses, it will be the political and economic regulations that are the priority now, not the media. The Bank of England PRA (Prudential Regulation Authority) in the financial services sector launched Supervisory Statement 03/19 last year and it requires regulated firm to do two things. One, that there is a senior manager (as part of The Senior Managers Regime) responsible for climate change and two, the requirement to disclose the impact of climate change on your business model and your portfolios, whether it is a bank mortgage book, asset managers investment portfolio or an insurers’ underwriting portfolio. That’s a pretty complicated thing to model and the proposal is to stress test and model these risks and opportunities over the short-term (3 years) and long-term, up to 30 years. Many in financial services are very uncomfortable with this as they are more accustomed to modelling capital requirements or solvency over a much shorter time frame!   

Q  Sue Clark, NED, Britvic Plc; Everything you talk about seems to suggest that we’re going to get more taxes and cost of commodities/food stuffs etc. is going to go up. We know that applying taxes is very regressive and one of our big issues in society is polarisation between the haves and have-nots. What you describe seems to be broader and if higher taxes are imposed – for every one person who’s going to march with extinction rebellion, we may have other people who will march to say we don’t want carbon taxes. So are we having a London, middle-class, affluent conversation here and the politics just won’t let us make progress to move away from gratification now to address the future?  

A  I agree with that but we’re at a point where if we leave the status quo as is then in 10 or 20 years’ time, the consequences could be so horrific, we’ll get a different type of social consciousness. I think there is opportunity to reel in the consumer. There are lots of great ideas – supermarkets and businesses looking at packaging and sourcing policies, plus their sustainability policies. Companies can be very influential in what they are offering to the consumer.   

Q  Sue Clark, NED, Britvic Plc; Initially you were talking about incremental impacts but it seems like something radical has to happen in the next 10 years. We currently have a government for the next 5 years who is not on top of this agenda at all so I wonder if we can radically change things in that timescale.  

A  The trouble with having 5 year government terms, is that with a problem that needs to be solved across 30 years, it is difficult to have consistency of policy in order to drive the changes needed. So some of those changes need to come from business. Business can choose to say we’re going to make a decision now and we need government to support it in order to change our climate in the long term. In 15 years, it will be 2035 and far too late to manage climate change if we have not already taken steps to significantly change our carbon emissions.   

John Scott, biography:  

John Scott is Head of Sustainability Risk for the Zurich Insurance Group. He joined Zurich in 2001 becoming Head of Risk Insight in 2007 and was Chief Risk Officer for Zurich’s Global Corporate and Commercial Insurance businesses from 2009 to 2017. He took on his current role in 2018. John leads the Group’s engagement on sustainability, both internally and externally as the way Zurich delivers its purpose and values.