An Ideas-Based Online Magazine of the Global Network for Advanced Management

The Challenge of Climate Change: Understanding the Impact

Climate change presents enormous challenges for the world, and for organizations that are accustomed to doing business in an environment on the verge of radical transformation. The United States' decision to withdraw from the Paris Agreement has added a new complication. Global Network Perspectives asked experts across the Global Network for Advanced Management about impact of climate change—and the U.S. withdrawal—in their regions.

What are the long-term risks, both for business and the environment, in your region from climate change?

It starts with changing weather patterns, and how those weather patterns affect people and companies. If you put more energy into the system, you get more energy coming out—increasingly in the form of extreme weather events—including flooding and heat waves.

People are trying to get their arms around what more intense cycles of wetter and drier weather mean for both producing and accessing things in different regions. If you have just-in-time inventory and the port is closed or the roads are closed, it’s not just-in-time anymore. This was a huge issue when Bangkok flooded a number of years ago, and automakers were not able to access the parts they needed. In our region, forestry operations often depend on frozen ground for heavy equipment to access the trees most effectively. As freezes and thaws before more difficult to predict and more variable in duration, that can create major issues. Flooding and droughts also pose real risks to human health and survival.

Similarly, heat waves pose real risks to humans. They are also leading to impacts on transportation infrastructure. Trains in the New York region recently experienced delays during a high temperature period because the tracks got too soft and wobbly for the trains to run. In the Southwestern part of the U.S. this summer, they’ve had to ground smaller jets that can’t take off in the hotter, less-dense air.

More broadly, flooding, drought, and heat events are causing more people to consider the relationship between climate change and immigration. How much of human migration is caused by war? How much of war is caused by lack of access to water and related issues? The U.S. Defense Department has developed a lot of information about the threats to national security posed by climate change—which is ironic, given that so many people are so supportive of the Defense Department, but not on the climate issue.

How much are employees and consumers holding companies accountable for their business’s stance on climate-related issues?

The 2015 Global Network survey “Rising Leaders on Environmental Sustainability and Climate Change”  gave us terrific insights into this. Eighty-four percent of the students responding from Global Network member schools said that they would be much more likely to work for a company that had a good record on these topics, and 44%—many more than we had expected—said that they would take a pay cut to go work for a company that acted responsibly on these issues. Particularly moving forward, companies are going to need to think about the impact of their policies in this area on attracting the talent they want.

As for consumers, while I’m not a marketing expert, my impression is that the number of consumers looking at corporate social responsibility for the companies from which they buy is increasing quickly. In the B2B space, it’s often more about saving money (say, by using energy more efficiently), but we are seeing consumer pressure all along supply chains—witness the controversies in the palm oil sector over deforestation.

Meanwhile, the vast majority of investors would probably say they mainly care about financial risks. But increasingly, in part because of reports like Risky Business, companies are realizing the need to factor climate into their financial risks. Particularly if they’re in agriculture; even more so if they have long supply chains or have buildings that are at risk because of their proximity to the ocean.

You’re also starting to see a significant increase in the number of big financial institutions asking for more sustainable investment options, because their individual clients are asking for it as part of their portfolios. In addition, you’re seeing more people in the private equity realm offering impact-investing opportunities in areas like renewable energy and energy efficiency.

My colleague Todd Cort has been doing a lot of work on green bonds, which have gone from no market share to billions of dollars of issuances in a few years. There’s a reason they’ve gone up that quickly: these are credit-worthy borrowers, which means you’re not asking people to take a leap of faith in credit-worthiness. So you’re adding a good environmental outcome to a credit-worthy borrower, which is a win-win.

For a long time, people thought that if you invested in green financial products, you would give up some financial return. Most of the data that I’ve seen on how publicly traded stocks perform suggest that, in fact, the companies that have stronger environmental records do slightly better than the companies that don’t. Why is that? Many people think that it’s because having good environmental programs in place is an indicator of good management, and good management means you usually make more money. They don’t waste raw materials. They don’t create unnecessary liabilities.

What impact, if any, could the United States leaving the Paris agreement have on your country or region?

Since we’re in a “blue state,” the major impact here is to increase the importance of the experiments that states such as Connecticut are conducting on how best to adopt policies to reduce emissions, while growing the economy. While I’m sure there will be efforts to roll some of these programs back, I don’t think they will succeed, because we are seeing parts of our economy doing quite well around renewable energy and related enterprises. We’re also seeing flooding and extreme events that are causing people to say, “Maybe there is a connection. We need to think and care about this.”

For example, one of the nuclear power plants on Long Island Sound had to shut down for a while because the water was too warm to effectively cool the plant. That’s significant and quite scary.

One major difficulty is the timing. Should we be worried about the impacts of climate change on a quarterly basis? On a yearly basis? On a “how long am I going to own this house” basis? On a grandchildren basis? On a seven-generations basis? And where does any of that fit compared to, Do I have a job? Do I have access to healthcare?

One of the difficulties about climate change is that it’s not immediate. Humans are hardwired to react to threats they can see. This one is hard, because you can’t see it and because many of its impacts are down the road.