A General Approach for Financial Quantification of Climate Change Risk for Enterprises

A General Approach for Financial Quantification of Climate Change Risk for Enterprises

Mahesh Gangaram Kanak (Indian Institute of Management (IIM), Lucknow, India) and Sunita Purushottam (Treeni, India)
Copyright: © 2020 |Pages: 42
DOI: 10.4018/978-1-5225-9940-1.ch008

Abstract

Climate change is a major risk for the global economy. Increased frequency of climatic events coupled with unsustainable economic development without considering environmental & social aspects has resulted in runaway climatic impacts. It became evident for all stakeholders to work in unison; which led to formation of Task force on climate-related financial disclosures (TCFD). Financial quantification of climate risk is a new area to be explored & could be an effective measure to tackle climate change. This chapter provides a general approach for financial quantification of climate change risk for businesses to understand & prioritize climate action. Though the approach is limited to the manufacturing sector, it can be used with some modifications for other sectors. It will help find impacts that climate change could pose to supply chain using various tools & evaluation of its usefulness. As 'Climate Action' is part of Sustainable Development Goals; it will be useful to understand how integrating TCFD could help enterprises tackle climate change by localizing SDG-13 into their businesses.
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Introduction

A pendulum at rest can be said to be in static equilibrium, while a pendulum in motion is in dynamic equilibrium. Similarly, the earth is in dynamic equilibrium, constantly rebalancing through physical and ecological processes that act on both human and geological time scales (CPA, 2017). Everyone has to bear the impact (positive or negative) of Earth’s dynamicity. Industrial revolution has enriched the lives of humans, but at the expense of harmful forces in the natural processes such as the anthropogenic greenhouse gases.

Our everyday life is influenced by past and current climatic conditions as depicted in Figure 1. We are habituated to normal living conditions but get sensitive once the conditions fall outside normal. Climate change poses number of challenges to different groups of people. The impact of climate change is severe for those living in the vicinity of areas prone to coastal storms, sea level rise, and other natural disasters. Enterprises are no different and are impacted because of climate change. Almost every type of business is dependent on climate, and hence are affected by climate change risks. Various studies have provided a clear understanding of cause and effect between emissions and climate change. Record-breaking high temperatures, humidity, sea level rise, natural disasters, and many other indicators show that earth is heating up fast, and all emissions that are being released into the atmosphere from fossil fuel burning is changing our climate.

Figure 1.

Climate change: processes, characteristics and threats (Source: (Philippe Rekacewicz, 2006))

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Climate Change Impact in India

The rapid rate and magnitude of climate change related impacts is of greatest concern worldwide. India has experienced decreased snow cover, affecting snow-fed and glacial systems such as the Ganges and Brahmaputra as depicted in Figure 2; 70% of the summer flow of the Ganges comes from melt water, erratic monsoon with serious effects on rain-fed agriculture, peninsular rivers, water and power supply, drop in wheat production by 4-5 million tones, with even a 1ºC rise in temperature, rising sea levels causing displacement along one of the most densely populated coastlines in the world, threatened freshwater sources and mangrove ecosystems, increased frequency and intensity of floods with vulnerability of people in coastal, arid and semi-arid zones of the country (Pink, 2016). Studies also indicate that over 50% of India’s forests are likely to experience shift in forest types, adversely impacting associated biodiversity, regional climate dynamics as well as livelihoods based on forest products (Pink, 2016). The biggest impact of climate change is the change in the natural water cycle and this creates a series of cascading impacts on water availability, food, transportation and therefore is material to every business on earth.

Figure 2.

Impacts of climate change in India (Source: Infographic by Business Today)

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