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Business in a Post-Holocene World

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The talk in the investment world is the impact of the Australian floods on coal markets. Supposedly once-in-a-century rains have inundated Australia's open pit mines, turning them into lakes that can be seen from space. Investors are now scooping up stocks in coal producers operating in Canada and other regions not affected by Australia's tumultuous climate.

I mention this because I am currently teaching an MBA course on sustainability at INCAE, Latin America's leading business school, and as I was preparing for class I ran into something interesting. In a 2008 Pew Center for Global Climate Change report entitled "Adapting to Climate Change: A Business Approach" there is a table on the potential effects of climate change on business sectors. There is a single line in the "mining" sector risks section that reads:

"Extreme weather events increase physical risk to business operations, for example due to flooding."

I don't know how many Australian mining executives read this report, but I suspect many are resurrecting it. Often it takes a crisis like these floods to get executive attention on sustainability issues, but business leaders with foresight have an opportunity to learn from the misfortunes of others.

Since the beginning of the commercial revolution in the 14th century, executives have built or lead their businesses in what scientists call the Holocene climatic epoch, a geologic time period that began at the end of the last ice age around 12,000 years ago. The Holocene has been good to humankind. It coincides with the rise of agriculture and civilization, through the industrial revolution to the information age today. But by most accounts it has come to an end.

Our opportunity to extend the Holocene probably ended when the Reagan Administration symbolically pulled the solar panels off the White House in 1986. I am not being political here and I am emphatically not blaming the Reagan Administration for climate change. My academic work on carbon lock-in shows how past energy and societal development have locked us into fossil fuels, as the ineffectual Clinton and Obama Administrations discovered. But extending the Holocene depended on taking actions to reduce our emissions of greenhouse gases decades in advance, in order to keep the carbon dioxide levels in the neighborhood of 350 parts per million. We are, as of today, at 388 ppm and rising at about 2 ppm per year.

The results of the recent climate negotiations in Copenhagen and Cancun give no sign that policymakers are going to take real mitigative action anytime soon, so executives need to ask what a post-Holocene climate means for their businesses. Some companies have already discovered the answer.

The beverage industry, for example, recognized their business is dependent on continuing supplies of fresh water. Extreme weather events, physical disruption to infrastructure or prolonged droughts all threaten unwanted supply disruptions. So companies like Coca-Cola, Heineken and Unilever are integrating water and climate variables into their strategic planning. Anheuser-Busch-InBev has completed comprehensive assessments of their climate risks and has funded research into steps that will allow them to adapt and insulate the business from climate disruptions.

Other sectors planning for business in a post-Holocene world include insurance, winter resorts, agriculture, utilities and oil & gas. Part of the preparation is traditional risk analysis to identify and mitigate hazards. But the other side is seeking business opportunities. Imagine the ignominy of the British producing better Champagne than the French. But climate change has already set that in motion, and British growers are gaining the advantage because of it.

So what steps can business leaders take to prepare? The first step is to build awareness in the organization about climate change and adaptation. Given the state of the political debate around climate, this can be the hardest step. But there are plenty of real life "as we speak" examples of industries being impacted by changes that can illustrate the risks to colleagues. The next step is to seek out the work scientists and governments have done on trying to predict what changes are likely. This understanding feeds into a comprehensive risk and opportunities assessment that can be used to create a list of potential actions and options. Doing this alone will put your company ahead of most. If your organization is convinced that the risk and opportunities are material, then strategic planning is the next step forward.

Many business people, when they see events like the floods in Australia, will ask, "Do we know it's caused by climate change?" Unfortunately, the best answer scientists can give is, "Well no, but there is a statistically significant probability that this event falls within our predictions." That's not very persuasive to people used to driving decisions with concrete investment ROIs .

For a long time it hasn't been persuasive to Australian governments either, who vociferously fought action on climate change. But that has changed. The Aussi government recently launched a $12.9 billion program to girder the country's water supplies against climate change and is requiring ongoing climate adaptation reviews every five years. As one government report puts it, "Already Australia faces a stark fact -- the opportunity to avoid climate change altogether has passed." The same is true for your business. So what will it look like in a post-Holocene world?

Cross posted at Forbes.com

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