Managing for climate risk

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527
I n recent decades, scientific evidence has shown climate
change is real, and actions toward both climate mitiga-
tion and adaptations are required (Pachauri & Reisinger,
2007). While increasingly salient as a business imperative
(Shrivastava & Berger, 2010), the business impacts of cli-
mate change are not yet fully tangible. By this we mean
that the full set of direct effects of changing ecosystems is
not yet apparent for businesses; neither are the indirect
effects through market and regulatory pressures. This
leaves firms in a state of uncertainty. From a strategy per-
spective, the key question for organizational leaders is how
to best respond in terms of a comprehensive climate risk
strategy. Not having a climate strategy will likely leave the
organization in an unfavorable position in relation to just
about every aspect of organizational existence. The mar-
kets the organization operates within, the regulations that
it must comply with, and the physical assets of the organi-
zation itself are all threatened by the impending climate
issues. We propose that firms might best address the
uncertainties driven by markets, regulation, and the natural
environment by exploring three corporate objectives for
managing climate risks: (1) risk reduction, (2) risk transfer
and/or compensation, and (3) risk avoidance. By integrat-
ing these response objectives with pressures from three
types of uncertainty—government regulation, the market,
and the natural environment—we explore nine specific
climate risk actions. We also offer a framework for organi-
zational leaders to use in deciding which response(s) to
choose given organizational realities.
As an example, this framework is helpful in figuring out
and learning from what happened to the once environmen-
tal leader in the oil and gas industry, BP. In 2000, BP
launched a high-profile ad campaign to position the com-
pany as the environmentally friendly “Beyond Petroleum.”
Nevertheless, the company received ongoing criticism for
its marginal investments in low-carbon technologies and
environmentally controversial businesses—for example,
the Canadian tar sands project, the Texas oil refinery
explosion, the Alaska oil pipeline spill, to name a few
(Ruffing, 2007; UK Tar Sands Network, 2010). With the
2010 oil spill in the Gulf of Mexico, the company was
ultimately accused of being a “greenwasher” and faced a
roughly 50% decline of its share price. What went wrong?
Among the reasons, we argue that BP did not adequately
manage its climate risks. For example, the National
Commission on the BP Deepwater Horizon Oil Spill and
Offshore Drilling (2011) reported that decision-making
processes did not adequately ensure the project’s safety
and that environmental risks were not fully considered;
rather, they primarily focused on saving time and money.
56
M ANAGING FOR CLIMATE RISK
T IMO BUSCH
Swiss Federal Institute of Technology Zurich
S TEPHANIE G. BERGER
Concordia University
R AYMOND PAQUIN
Concordia University
Copyright © 2012 SAGE Publications. Not for sale, reproduction, or distribution.
Published as:
Busch, T., Berger, S. G., & Paquin, R. 2012. Managing for climate risk. In D. Rigling Gallagher
(Ed.), Environmental Leadership Thousand Oaks, CA: Sage.

528–•–IX. TAKING ACTION IN THE FACE OF SCIENTIFIC UNCERTAINTY
So what are corporate climate risks, and how can firms
develop an effective climate risk strategy? Our answer is
based on several studies that investigated corporate responses
to climate change in four industries. From this work, we
illustrate a range of possible climate risk actions and discuss
how companies can develop an effective climate risk strat-
egy. A key challenge we note in this chapter is for business
leaders to distinguish between those risks requiring urgent
and substantial action and those where they have more lati-
tude in forming a response. The framework we develop here
supports managers’ decision-making processes for manag-
ing climate risks and provides guidance on how to address
multiple types of climate-related risks.
Corporate Responses to Climate Change
In recent decades, scientific evidence has shown that cli-
mate change is real and that climate mitigation alone is no
longer an option (Pachauri & Reisinger, 2007). From a
business perspective, climate change affects firms in many
ways, forcing managers to adapt to increasing climate regu-
lations, to market pressures toward low-carbon business
choices, and to potentials for extreme weather events. Even
as climate change threats gain salience for business leaders,
the full impact of climate change is not yet entirely clear in
the regulatory, market, or natural environments. This leaves
firms in a state of uncertainty in each of these environ-
ments. First, firms have to prepare for impending or poten-
tial governmental regulation that may affect their business
activities. Second, firms have to evaluate and incorporate
shifting market and institutional pressures from stakehold-
ers demanding action around climate change mitigation
(Kolk & Pinkse, 2007). Third, firms need to adapt to a
changing natural environment, which likely influences their
ability to acquire natural resources for production and con-
sumption (Winn, Kirchgeorg, Griffiths, Linnenluecke, &
Günther, 2010). Yet, to be successful firms must face these
climate-related uncertainties as part of their future strate-
gies. This begs the question: How do managers develop an
effective and comprehensive climate risk strategy?
We propose that firms can address these various climate
uncertainties and develop a comprehensive climate risk
strategy by exploring three corporate response objectives for
managing climate risk: (1) risk reduction, (2) risk transfer
and/or compensation, and (3) risk avoidance (Merna &
Al-Thani, 2008). From this risk perspective, we detail nine
particular actions for managing climate risk given the uncer-
tainties of the regulatory, market, and natural environments.
Uncertainty From the Regulatory
Environment
The development and enforcement of new climate regula-
tions is highly uncertain—especially in the context of
current international negotiations within the United
Nations Framework Convention on Climate Change
(UNCCC). Even without such international agreements,
firms will likely be confronted with more stringent
regional and national carbon emission regulations in the
future. Among the examples are the emissions trading
schemes implemented or being set up in Europe, Australia,
and some American states. Yet, it is still unclear how
related future carbon regulations may develop. Until there
is more regulatory clarity, many firms will simply not
make the necessary far-reaching investments (e.g., renew-
able energy technologies, alternative supply chain arrange-
ments) for climate mitigation. Instead, many leaders will
take a wait-and-see approach—as evidenced by utility
company executives’ unwillingness to make major cli-
mate-related investments without regulatory clarity (Lerer
& McCormick, 2010). A recent literature review of the
impact of the European Union’s (EU) emissions trading
scheme (Zhang & Wei, 2010) further illustrates this, show-
ing firms reluctant to make major investments given the
current uncertainty of the emerging emissions trading
system. These points illustrate the impact of regulatory
uncertainties around climate change on firms’ decisions to
invest in significantly reducing greenhouse gas (GHG)
emissions.
Uncertainty From the Market Environment
Firms also face increasing market pressures from stake-
holders such as consumers, financial markets, and value
chain partners who demand more action around climate
mitigation in return for purchasing goods and services,
investing capital, or partnering. Although the path toward
a low-carbon economy is still uncertain, firms may be less
reluctant to take a simple wait-and-see position when key
stakeholders demand change. As well, firms who engage
with their stakeholders directly on such matters may find
that they have more latitude in addressing stakeholder con-
cerns, and engaging stakeholders directly and openly can
potentially bring firms competitive benefits (Rondinelli &
London, 2003; Steger, Ionescu-Somers, Salzmann, &
Mansourian, 2009). As a result, we expect firms to proac-
tively engage with stakeholders as stakeholders bring mar-
ket pressures to bear on firms. Firms can engage
stakeholders in a number of ways, including taking a pre-
cautionary approach to new projects through seeking
advice and feedback or even integrating key stakeholder
representatives into firms’ decision-making process. In
this case, firms engage directly with stakeholders instead
of simply pushing messages. Another tactic is for company
representatives to join as working group members on com-
mittees tasked with defining new regulatory or industry
standards. In the climate change context, this is the case
with the further development of the World Business
Council for Sustainable Development (WBCSD) GHG
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56. Managing for Climate Risk–•–529
protocol regarding sector standards and supply chain
accounting rules (WBCSD, 2004). This already widely
applied accounting standard was recently revised to
improve the rigor, quality, and user-friendliness of the first
edition, with a focus on increasing consistency and trans-
parency of the reports and was designed by member orga-
nizations (WBCSD, 2004). Despite all these efforts, firms
still face uncertainty in how market expectations and
demands will develop in the future and how they may best
respond to these to be best positioned for environmental
leadership in their industry.
Uncertainty From the Natural Environment
In addition to market and regulatory uncertainties, firms
also face uncertainty from a changing natural environment.
Reinsurance companies have reported a steady increase in
extreme weather events (e.g., hurricanes, floods, wildfires,
droughts) globally (Munich Reinsurance Company, 2010).
While individual extreme weather events are localized and
often unpredictable, they can be quite devastating for
firms, causing business disruption, loss of inventory, dam-
age requiring significant investments to rebuild or repair
facilities, and diminishing economic capacity of client
bases, not to mention jeopardizing the employee base
through mortality, injury, and disease (Parry, Canziani,
Palutikof, van der Linden, & Hanson, 2007). On the other
hand, firms also face more gradual, though perhaps less
immediately perceptible, risk from the changing climate
itself. These impacts will likely manifest themselves
through longer-term changes to the ecological systems and
availability of natural resources upon which firms rely
(e.g., water, forests, arable land, snow/ice, ecological bio-
diversity), though such changes may be aggravated by
previous manmade changes. The drying up of the Aral Sea
over the past 20 years provides a cautionary tale. Once the
world’s fourth largest lake, over-irrigation and poor
resource management has shrunk the Aral Sea to 10% of
its original size, destroying entire cities and regional indus-
tries that depended upon it.
While climate change is as a global phenomenon, its
scope and impacts are likely felt more acutely as unpre-
dictable and severe regional crises. However, the more
gradual changes underlying these acute events are more
predictable. Thus, in addition to the increasingly accepted
view that aligning corporate strategies around climate risk
management is fundamental to long-term value (Climate
Disclosure Project, 2011), by acting sooner rather than
later firms can engage in more predictable planning of
future climate changes and address these gradual impacts
from a more strategic long-term perspective. Nevertheless,
firms face the challenge of how to best address and
manage the impacts climatic changes have on their busi-
ness given the prevailing uncertainties from the natural
environment.
Managing Climate Change Risk
The complete set of impacts of climate change is neither
entirely clear nor tangible in the regulatory, market, and
natural environments. Yet the intensifying impacts of the
changing climate, and the resulting pressures within all three
of these environments, means firms that do not address
these pressures through adequate mitigation and adaptation
strategies endanger their competitiveness, their profitability,
and potentially even their survival. Understanding what
actions exist for managing these risks is thus critical to
developing appropriate strategies to remain competitive.
To explore the types of strategies firms may take to man-
age climate risk, we draw on experiences gained in several
research projects conducted in four industries in Europe:
power generation, airlines, cement manufacturing, and win-
ter tourism. Most of the time we applied qualitative meth-
ods, namely interviewing managers, to explore companies’
perceived climate risk exposure and corresponding climate
risk strategies. Additionally, we surveyed power generation
companies and mountain railways to learn of their climate
strategies. Many of the firms studied had firsthand experi-
ence with climate change–related regulations, stakeholder
pressures, and/or damage to their facilities and production
disruptions. In separate projects, we also analyzed selected
firms’ Carbon Disclosure Project’s (CDP) publicly available
responses. The CDP aggregates and publishes firm-level
data on GHG emissions and GHG mitigation strategies.
From our interviews, surveys, and CDP responses, we
learned how firms in a number of industries experienced
pressure around climate matters and subsequently addressed
their risks through climate risk strategies. Based on these
insights, the first author clustered strategies and activities
into categories of risk management based on literature citing
regulatory, market, and natural environments as key areas of
risk. Depending on a firm’s particular climate risk exposure
within one of the three environments (regulatory, market, or
natural), executives seeking to address these risks may
engage in one or more of three general response objectives:
(1) risk reduction, (2) risk transfer and/or compensation, or
(3) risk avoidance. This 3 × 3 matrix yields nine fields for
potential actions. All strategies and activities were then
assigned to one of the nine cells of this matrix. From this, we
developed the corporate framework presented below. It illus-
trates how these nine specific climate risk actions reflect
various ways firms may address the regulatory, market, and
natural environment uncertainties discussed above in man-
aging their climate risks . We provide examples from a vari-
ety of contexts to show the broader applicability of these
strategies for managing climate risk.
Risk Reduction Actions
Firms can reduce their existing risks related to climate
change by engaging in political lobbying, decreasing
carbon dependency, and increasing operational flexibility
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530–•–IX. TAKING ACTION IN THE FACE OF SCIENTIFIC UNCERTAINTY
as ways to mitigate some of the impacts of climate change.
These reduction actions do not fully eliminate climate
risks, yet they do potentially reduce future climate-related
impacts on business. However, depending on how firms
engage in these actions, they may only be delaying the
need for more aggressive climate-related actions in the
future. Thus, we view these actions as having a short- to
medium-term timeframe for firms.
Engage in Political Lobbying
Though not a new strategy per se, executives can attempt
to shape impending or potential regulations in ways more
favorable to their firms. This could be particularly effective
for large and well-connected firms and for those firms who
have already shown engagement on climate issues. For
example, firms already in a leadership role regarding carbon
dioxide (CO
2 ) reductions could seek to have their managers
join working groups around future regulations. Having
already taken action, these managers would bring expertise
that governments and other regulating bodies might other-
wise need to seek out. By helping to define the standards,
firms are able to ensure that actions already taken are recog-
nized and built into new regulations. Moreover, this keeps
firms at the leading edge of regulation adoption. One
example for this is the cement producing company Holcim
in Switzerland and its engagement in the Cement
Sustainability Initiative (CSI). This initiative is a global
effort by 23 major cement producers with operations in
more than 100 countries, which account for about one third
of the world’s cement production. Acknowledging the high
contribution of cement processes to global carbon emis-
sions, CSI seeks to identify actions that cement companies,
individually and as a group, can take to accelerate progress
toward reducing environmental impacts. Through these
efforts, member companies have become involved in the
political processes of developing regulations around CO 2
emissions, fuel and material use, employee health and
safety, and emissions monitoring and reporting (CSI, 2011).
Decrease Carbon Dependency
In response to uncertainties in the market environment,
firms can decrease their carbon dependency without actu-
ally increasing their carbon efficiency. Dependency and
efficiency are linked here to show that transferring to a
less-carbon dependent resource can send a positive mes-
sage to outsiders without actually making the operations
more efficient per unit of carbon. An example of this could
be switching from a coal-based to gas-based combustor.
Firm executives can use such actions as a way to suggest
they are addressing stakeholder concerns proactively.
Increase Operational Flexibility
Responding to uncertainties in the natural environment,
firms can seek to balance potentially negative impacts of
extreme weather events and gradual climate changes
through increasing their operational flexibility. For exam-
ple, firms can reduce the impact of climate-related supply
disruptions by increasing their production inventories and/
or diversifying their production inputs. Doing so, of
course, likely requires rebalancing firms’ production and
supply chain objectives and is also somewhat at odds with
the prevailing approach of just-in-time inventory or lean
production, which has become prominent over the past
three decades. However, as we saw following the 2010
Japanese earthquake and 2011 floods in Thailand, entire
Risk Reduction
Risk Transfer/
Compensation Risk Avoidance
Regulatory
Environment
Changing govern-
mental regulation
Engage in political
lobbying
Enhance involvement in
carbon markets
Adapt business model to
become independent from
regulation
Market
Environment
Changing market
pressures
Decrease carbon
dependency
Outsource or offset
carbon-intensive processes
Substitute fossil fuels by
renewable sources
Natural
Environment
Changing climate
conditions
Increase flexibility to
balance impacts of
climate change
Hedge against potential
climate-related disruptions
and losses
Relocate production
facilities to nonexposed
regions
Table 56.1 Corporate Actions to Manage Climate Risks
Response Objective
Source of Uncertainty
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56. Managing for Climate Risk–•–531
industries can be hobbled when firms are completely
dependent on suppliers who can no longer meet their sup-
ply chain obligations. While perhaps not as useful for ser-
vice-oriented firms, product-oriented firms can increase
operational resilience by creating a bank of production
inventory, creating flexibility in production inputs, and
even diversifying suppliers, thus reducing the risks from
regionalized extreme weather events. An example of creat-
ing flexibility in production inputs can be seen with Chief
Industries. When one of its facilities required a new boiler,
managers faced the question of sourcing its fuel. The initial
decision was to build a coal-fired boiler, but managers
later decided on a dual-fuel boiler, which could run on coal
or natural gas, decreasing the firm’s dependence on a sin-
gle fuel source (Nilles, 2006).
Risk Transfer/Compensation Actions
To transfer and/or compensate for climate risks, firms
can externalize their climate exposure to third parties by the
following three actions: enhance involvement in carbon
markets, outsource or compensate for carbon-intensive pro-
cesses, and hedge against potential climate-related disrup-
tions and losses. With these three transfer/compensation
actions, firms do not eliminate any of their climate risks;
rather, they externalize the risks in various ways to outside
parties. Given that these approaches do nothing to actually
reduce carbon emissions, we consider these actions to be
rather short-term and perhaps even short-sighted solutions.
Enhance Involvement in Carbon Markets
In response to regulatory uncertainties, firms have the
option to enhance their involvement in carbon markets.
Many firms, especially in the EU context, are covered by a
mandatory emission trading scheme. Such schemes allow
the banking and trading of emission allowances, as well as
the purchase of emission futures and options. Here, a firm
expecting higher allowance prices can transfer the price risk
to the carbon market. For example, RWE (2011) is one of the
largest energy providers in Europe and is actively involved
in the carbon markets. In 2010, the EU Emission Trading
Scheme allocated RWE certificates permitting them to emit
90 million tons of CO
2 equivalents (Carbon Market Data,
2011). The power generation portfolio of RWE consists of
over 70% coal and just 5% renewable energy sources: emit-
ting 144 million tons of CO
2 equivalents , meaning RWE
bought 54 million tons of emissions permits.
Outsource or Offset for Carbon-Intensive Processes
To respond to pressures within the market environment,
firms can generally seek to outsource carbon-intensive pro-
cesses. This action shifts focus away from the firm and to
its supply chain partners. When outsourcing carbon-inten-
sive processes is not a viable option for a firm, it can offset
for carbon-intensive processes. With this option, firms may
choose to voluntarily offset their emissions in response to
market demands and stakeholder expectations. Many firms,
for example, purchase carbon offsets to cover their own
carbon emissions, and thus through these purchases can
claim to be carbon neutral. Companies are increasingly
entering the voluntary carbon market, including Ford Motor
Company, HSBC, Google, and DuPont (Business for Social
Responsibility, 2006). In 2006, Credit Suisse (2010) became
the first major corporation in Switzerland to achieve green-
house gas neutrality when it launched the Credit Suisse
Cares for Climate initiative. However, this approach is not
without its own risks, as a recent report by the David Suzuki
Foundation (2009) highlights that the voluntary offset mar-
ket is largely unregulated; thus, it is important to choose
offsetting options carefully.
Hedge Against Potential Climate-Related
Disruptions and Losses
In response to uncertainties in the natural environment,
firms can consider hedging against potential disruptions
and losses caused by changing climate conditions.
Certainly, taking out insurance related to climate risks
makes business sense, especially in light of the historically
extreme year that 2010 represented (Munich Reinsurance
Company, 2010). Firms can increase insurance against
extreme weather events to cover for estimated losses and
hedge against future production and supply chain disrup-
tions because of more gradual climate changes. As such,
firms may choose between weather derivatives, contin-
gency insurance, and indemnity insurance.
1 The first pro-
tects against the financial consequences of unexpected
climate variations. Contingency insurance compensates a
company’s financial losses because of temporary produc-
tion interruptions. Indemnity insurance protects against
physical damage to production and product distribution
facilities caused by extreme weather events.
Risk Avoidance Actions
While the above discussed transfer/compensation
actions address real short-term risks, the longer term risks
inherent in climate change remain unaddressed here. The
most integrated and long-term strategies are those that
seek to avoid climate risks altogether. Firms can seek to
integrate strategies for climate risk by the following three
actions: Adapt the business model to become independent
from regulation, substitute fossil fuels with renewable
sources, and relocate production facilities to nonexposed
countries. These three actions allow firms to avoid expo-
sure to climate risks and potentially eliminate negative
consequences of climate change.
Adapt Business Model to Become
Independent From Regulation
First, to avoid any risks stemming from uncertainties
in the regulatory environment, management can develop
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532–•–IX. TAKING ACTION IN THE FACE OF SCIENTIFIC UNCERTAINTY
strategies to adapt the firm’s business model to become
independent from potential new regulations. Interface, an
industrial carpet manufacturer, is well known for its efforts
here. In the late 1990s, Interface began to source plastics
from recycled suppliers with the aim of eliminating depen-
dence upon new petroleum-based products (Arena, 2004).
Interface’s CEO, Ray Anderson, regarded climate change
and the issue of peak oil as key future challenges for indus-
try and policymaking alike (Canadian Broadcasting
Corporation, 2010). This firm is an example of one that
employs hybrid strategies to address climate risks and envi-
ronmental issues by changing its business model. It imple-
mented a new strategy by offering customers the ability to
exchange tiles of used carpet (reclamation), leasing carpets,
and eliminating dyes from carpets deemed toxic for the
environment.
2 Perhaps its most interesting action in the face
of climate change was that the company essentially ceased
to sell carpet in favor of leasing it. This ensures that the raw
materials are returned to the plant for reinsertion to the
manufacturing process (Arena, 2004). The firm has been so
successful in its risk management endeavors that, in the mid-
2000s, it further extended it business model by creating a
consulting arm, InterfaceRAISE.
3 Beyond these rather fun-
damental business model changes, another option in this
context is to focus on production locations in nonregulated
countries. Relocating facilities to regions of the world that
continue to lag behind in environmental regulations is one
way to avoid or eliminate risks associated with financial
penalties, at least for a finite period.
Substitute Fossil Fuel–Based Energy
With Renewable Sources
Firms can substitute fossil fuel–based energy with
renewable sources such as wind, solar, wave, hydro, or
geothermal, to name a few. Such a proactive effort reflects
future market trends and addresses the necessity of switch-
ing to noncarbon-based energy sources. Of course, at this
time, doing so is a huge challenge for many firms.
However, recently there has been a marked rise of invest-
ments in renewable sources. For example, the United
States installed more than 10 times as much solar energy
in 2010 as in 2005 and 102% more in 2010 than 2009
(Solar Energies Industry Association, 2011). This expan-
sion, and similar expansion worldwide, is helping solar
energy become more cost competitive with fossil fuels.
While society as a whole will likely not fully retreat from
fossil fuels for several more decades, in the long term, this
is one of the actions most likely to mitigate risks associated
with climate change. One example among many of a firm
moving away from fossil fuel energy is the German soft-
ware company SAP (2011), which committed itself to
renewable energy use. In 2010, SAP purchased 48% of its
energy needs from renewable sources—namely, solar,
wind, hydro, and biomass—and intends to increase this
share in coming years.
Relocate Production Facilities to Nonexposed Regions
Taking a different approach, firms may consider relo-
cating production facilities to nonexposed regions in
response to mounting pressures within a changing climate
system. Firms taking this approach may move their exist-
ing facilities and/or build new facilities in regions that will
likely be less ecologically volatile and/or where expected
climate changes would actually benefit the firms’ busi-
ness. Such actions can reduce the exposure to both climate
change phenomena: the increasing intensity of extreme
weather events as well as more gradual temperature
changes. For example, Tabasco, the maker of hot sauce,
grew the peppers used in the sauce on Avery Island,
Louisiana, until 20 years ago. Because of rising waters and
shrinking arable land, the firm focused its Avery Island
farming effects on producing its “seed crops” and out-
sourcing the large-scale growth of those crops to more
stable—in terms of weather conditions—regions in the
world (Friese, Kraft, & Nabhan, 2011). Another example
related to gradual climate changes is European ski resorts.
Many ski resorts in Europe have started installing snow-
making machines and locating ski lifts in higher altitudes
as temperatures rise and overall precipitation decreases
(Hoffmann, Sprengel, Ziegler, Kolb, & Abegg, 2009). With
this action, the resorts increase their flexibility by still
being able to operate the lifts when snow is lacking in
lower altitudes.
Rationales to Support Risk
Management Decisions
The decision matrix offers solutions, but organizational
leaders often need supporting tools and rationales for their
decisions. The risk management framework in Figure 56.1
provides a set of tools and rationales to support managers
as they develop their firms’ individual climate risk strate-
gies. Of course, every firm has to develop its specific
strategies in light of different inter- and intra-industry,
regulatory, and geographic differences. Yet every firm is
exposed to climate risks at some level; this framework can
help managers better understand their particular options
and find their individual mix of specific climate risk
actions. The framework in Figure 56.1 provides a decision
path for managers seeking to effectively manage climate
risks.
Following this four-step logic, leaders first evaluate the
firm’s general exposure to each of the four climate risks
discussed. From here, leaders can assess the likelihood of
occurrence and potential costs for individual climate risks.
For each individual risk identified as important, leaders
can then choose the risk response option based on the
potential costs and benefits of each risk action. The result
is a detailed reflection of a firm’s risk and the investment
costs and potential additional benefits. From this
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56. Managing for Climate Risk–•–533
information, a cost-benefit analysis can be performed and
an appropriate mix of specific climate actions can be
developed. The result is an individual climate risk strategy,
which should be continuously evaluated after its initial
implementation, reformulated, and re-implemented.
The evaluation of general exposure to the climate risks
stage is designed to help organizational leaders define
where their exposure mainly rests. For example, Walmart
would likely agree that its exposure does not rest with
regulation or weather events but with the interaction
between market stakeholders such as customers and sup-
pliers. Given this, the organization can focus attention on
strategies that align with this reality. In essence, the first
question asks the organizational leader to focus attention
and resources on the crux of the climate change exposure
for their firm.
The second question asks organizational leaders to
identify the likelihood of the exposure type to occur. Given
that Walmart has identified that customer demand for
greener products is the area of greatest risk, its leaders
could then determine the likelihood that customers will
actually demand greener products. If the year is 2000, the
answer is probably low; but by 2010, the answer was
changing. The accompanying question in this section asks
leaders to quantify the potential costs of not addressing the
exposure. While we can expect the costs for Walmart to
vary relative to occurrence, for an organization such as
Shell Oil, for example, the costs of not addressing are
rather small. The point is that each company will be able to
identify for itself how likely the exposure would be and, in
addition, how costly.
In the third section of the framework, the organizational
leader is asked to assess the costs and benefits of a course
of action based on the nine responses suggested earlier in
Table 56.1. Given that the costs of not addressing the expo-
sure are high in section two, either risk reduction, transfer,
or avoidance will be necessary. Each type of response car-
ries with it investment costs and benefits. Depending upon
the analysis, an organizational leader can provide support
for a chosen response.
Obviously, the response with the lowest implementation
costs and greatest benefits will be the most desirable ini-
tially. However, the juxtaposition of the other types of
responses might indicate that it is preferable to implement
a mix to counterbalance the drawbacks not captured by a
single response type. Last, the framework reminds leaders
to plan an implementation strategy based on the analysis
and to follow up with continuous evaluation.
This framework presents strategies that can more
broadly support firms’ resilience (Pfeffer & Salancik,
1978). Based on this framework, firms are able to deter-
mine their individual climate risk strategy and implement
appropriate climate mitigation and adaptation efforts. BP,
for instance, could base their future strategy on insights
regarding uncertainties from the regulatory, market, and
natural environment for the oil business. As time passes,
2) Assessment of individual climate risks
4) Implementation of climate risk strategy
3) Analysis of available actions for addressing important climate risks
Risk reduction:
Cost-benefit analysis
for each climate risk
action
Decision on mix of
specific climate risk
actions
Implementation of
strategy and
continuous evaluation
Risk transfer & compensation:
Risk avoidance:
Climate change
regulation
Climate-related stake-
holder engagement
Extreme weather
events
Gradual climate
changes
Likelihood of occurrence:
Potential costs:
very rare .................. very likely
very highvery low ..................
Investment costs additional benefits
0 / + / ++
0 / + / ++
0 / + / ++
0 / + / ++
0 / + / ++
0 / + / ++
x x
1 5
5
1
x x
1) Evaluation of general exposure to climate risks
Figure 56.1 Framework for Managing Climate Risks
Copyright © 2012 SAGE Publications. Not for sale, reproduction, or distribution.

534–•–IX. TAKING ACTION IN THE FACE OF SCIENTIFIC UNCERTAINTY
oil deposits will be waning and regulations regarding the
sourcing, refining, and distribution of petroleum prod-
ucts will be increasing around the world. In addition, it is
likely governments will intensify efforts around low-
carbon businesses. As market stakeholders become more
aware of climate change as a serious issue, changing
consumption preferences may result in new market pres-
sures. And finally, changing climate conditions may not
allow firms to continue sourcing in areas where it was
possible in the past. In light of these uncertainties, par-
ticipating in the development of regulations and stan-
dards and increasing the flexibility of operations may be
suitable actions to reduce their climate risk exposure in
the short term. In the long term, however, more substan-
tial actions are required to avoid BP’s climate risks.
Adapting their business model to become the global
leader in renewable energy sources could be a visionary
environmental leadership effort.
Conclusion: Get Started Now!
In short, firms facing regulatory, market, and natural envi-
ronment pressures have to respond, and this requires clear
environmental leadership toward implementing substantial
climate risk strategies. When it comes to developing and
implementing a sound climate risk strategy, many firms
remain in a wait-and-see position or adapt more through
increasing their corporate communications rather than
substantively changing their actions. Yet not taking action
is becoming increasingly risky. As recent economic analy-
ses show, the longer firms wait, the greater the costs of
adaptation in the future (Hof, den Elzen, & van Vuuren,
2010; Stern, 2006; Tol, 2009). In other words, instead of
using these uncertainties to justify inaction, organizational
leaders should address these uncertainties as important
determinants for their future competitiveness and start
addressing climate change as a matter of risk management.
At the same time, as we have shown, not all climate risks
are equally important. Notably, such risks affect industries,
and even firms within industries, in different ways. The
challenge is that organizational leaders have to distinguish
between risks that require urgent and substantial action and
those that allow for a response with more latitude. Those
leaders who can make such distinctions and engage their
organizations to act in ways appropriate to each strategy
will find themselves ahead of the pack on environmental
issues and will likely secure environmental and market
relevance and profitability for the organization in the
future.
Notes
1. See http://www.wrma.org.
2. See InterfaceSERVICES at http://www.interfaceglobal
.com/Products/Interface-Services.aspx.
3. See http://www.Interfaceglobal.com.
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