Real Estate

Climate change a growing concern for companies expanding their footprint

This article originally appeared in The Guardian: http://www.theguardian.com/sustainable-business/hubs-water-climate-change-siting-drought-flood-business Traditionally, the most important factors in choosing a location for a new factory or operation have always been workforce supply and economic incentives. But a new consideration, climate change, is quickly moving up the ranks as a major factor for corporate decision-makers. Recently, as climate-related crises have hit cities across the globe, it's become increasingly clear that companies need to consider the financial impact of a paucity – or an excess – of water.

Operational, strategic and quality-of-life issues factor heavily in the decisions that giant enterprises make about where to locate their much sought after capital projects. As the devastating environmental conditions associated with climate change – including water shortages, severe storms, natural disasters, rising seas and hotter climates – become more pressing, it's clear that these, too, will become key considerations for companies hoping to press their competitive advantages.

As a result, these decisions will begin to dramatically affect both traditional and emerging business, transportation, manufacturing and travel hubs. And as with anything else involving corporations, real estate, jobs and money, there will definitely be winners and losers.

Supply chain links

In the wake of natural disasters, which appear to be getting increasingly severe, a "new normal" has emerged among corporate decision-makers. With some analysts citing the impact of the mutable climate, more companies are adding a climate-change dimension to their strategic supply-chain planning and site selection. Adaptive management of climate risks is playing a growing role in boardrooms and C-suites across the globe, particularly at multinationals.

A report from CDP, the global non-profit that measures vital environmental information, found that 72% of companies surveyed see physical risks from climate change disrupting their supply chain.

For New Orleans-based energy company Entergy, 2005's Hurricane Katrina was a lesson in the potential supply disruptions that could be caused by increasingly extreme weather events. Since then, Entergy has begun incorporating climate risks into its business planning and operating activities; consequently, it has strengthened its power-distribution network, including the sites that are most vulnerable.

Water, water nowhere

Companies often underestimate the importance of water to their business, and few have a comprehensive global process to assess water risk. But this is quickly changing, notably in the west and southwest regions of the US, as drought sinks critical water supplies. Companies in the food and beverage, mining and oil and gas companies sectors especially base their site assessments on high-level projections of water scarcity.

In 2013, the Aqueduct Project, a hydrological mapping initiative at the World Resources Institute, ranked 36 countries based on their water risk. Sixteen, including the UAE, Barbados, Cyprus, Jamaica and Singapore, received a 5.0, the worst possible rating.

But if drought is a consideration, so is flooding, and too much water can also affect site selection. After Thailand's extensive flooding in 2011, losses for badly damaged global parts suppliers alone totaled an estimated $15-20bn, and the flood hurt the bottom line of several multinationals, including Ford, Toyota, Dell, Cisco and Honda. HP, another company that was especially hard-hit, estimated that half of its 7% fourth-quarter 2011 revenue slide was due to the flooding. Not surprisingly, global companies are increasingly assessing the issue of monsoons and other water-related weather events when making decisions about where to locate or enlarge their facilities.

As for the US, it won't be long before severe water-supply problems in states like California and Arizona will begin to affect their popularity as site locations for plants. And look for other states as well as cities with plentiful supplies, such as those surrounding the Great Lakes, to woo businesses with water as their big asset. Already, Milwaukee is leveraging the business potential of its plentiful water supply. It's certainly not alone.

Site selection heats up

Water isn't the only climate issue that is increasingly affecting site selection. Too much heat is also becoming a factor as it becomes clear that fiery temperatures and air pollution can have a major, devastating effect on workplaces and workforces. Air-conditioning alone can't make up for such conditions.

A team of climate-change researchers recently studied 170m hospital admissions and eight million deaths in Germany. After tracking them season by season, day by day, for 10 years, they found that the temperature-and-pollution spikes associated with extreme heat events tended to increase hospital admissions and deaths by 2% to 5% the first day. Adverse health effects and mortality mounted with each day of a heat wave.

Interestingly, the analysis found that extreme cold events typically had a negligible to nonexistent impact on hospitalization and deaths. Distributed across the population of a country such as Germany or the US, the analysis estimates that the cost of a hot day is between 10 cents and 68 cents per resident in terms of health care and lost productivity.

Winners and losers

So, when it comes to site selection and climate, which countries top the list? The Notre Dame Global Adaptation Index (ND-GAIN), where I work, has ranked the climate adaptation performance of 177 countries over the last 17 years, has found that, while the top-ranked countries are often prone to sea level rise, drought and flooding, they are nonetheless able to maintain the security of their water, food, and health systems. They are able to preserve their fundamental ecosystems, and their coastal, energy and transportation infrastructures remain sound, enabling greater social, economic and governmental stability.

The ND-GAIN's highest-ranked country is Denmark, which has an index score of 83.4. Other European countries and Australia round out the top 10, while the US ranks 13th, with a score of 79.

North Korea is the lowest-ranked country, with an index of 34.3, and Afghanistan, Burundi, the Central African Republic and Eritrea fill out the bottom five on the list of countries that aren't likely to draw many foreign industrial and business operations any time soon.

The most surprising low-ranked countries are India, which is number 120, and China, which is number 98. But as two of the hottest spots for global business in the last decade, both demonstrate the impact that corporate investment can have on resiliency. India has moved up 10 points on the relative ranking since 1999, and China has moved between three and six spots during that period.

In real-estate parlance, the desirability of a property is based on location, location, location. And while climate change may still rank below such factors as workforce and incentives, more and more organizations are weighing climate conditions as they determine where they will locate new operations.

Consequently, cities, states and countries that lag on the climate-change index need to launch initiatives, such as public-private partnerships, to strengthen their attractiveness. The private sector, of course, can play an invaluable role in this effort.

This article originally appeared in The Guardian: http://www.theguardian.com/sustainable-business/hubs-water-climate-change-siting-drought-flood-business.

Urbanization and climate adaptation – how at risk is your supply chain?

Maplecroft, a global risk and strategic consulting firm in the U.K., noted recently that “resilience to major weather ….events is not improving in some of the world’s most important growth markets, leaving large sections of their populations, essential infrastructure and economies at ‘extreme risk.’” That view aligns with that of Notre Dame Global Adaptation Index.  The open-source GAIN Index underlines that climate change, population growth, urbanization and resource scarcity jeopardize urbanizing nations.

Why should we care?  Because we care about humanity and should make it a priority to help the most vulnerable adapt.  And because supply chains and investors are exposed to greater risk than anticipated as natural disasters exacerbate other political and societal risks.

Maplecroft describes an interesting contrast.  Its Socio-Economic Resilience Index ranks the U.S. at 169th and ‘low risk,’ even though it features in the “20 most at-risk countries for exposure to hurricanes, tsunamis, extra-tropical cyclones, storm surges, flooding, volcanic risk and wildfires.“  The Philippine’s socio-economic resilience to natural disasters, meanwhile, ranks No. 65 and ‘high risk’ Because, while it has registered strong economic growth over the last four years, “better disaster resilience has not materialized,” which keeps its index ranking unchanged.

The WEF Global Risks 2013 Eighth Edition posits that the twin threats of economic upheaval and accelerating climate change will collide during the next decade, delaying adaptation efforts while exposing nations to unpredictable financial loss from disasters. It contends that denser cities are more threatened by higher temperatures, exacerbated drought, storms and heat waves, although rural areas certainly are vulnerable from many of these weather-related events.  I do see a big climate risk derived from the ongoing population shift toward coastal zones.

In the CDP Supply Chain Report 2012-13, “Reducing Risk and Driving Business Value,” 70 percent identify a current or future risk related to climate change.  Seventy-three percent say they feel that climate change presents a physical risk to their operations.  More than half of the supply-chain risks identified due to drought and precipitation extremes already are affecting respondents’ operations or are expected to have an effect within the next five years.  According to the survey, the primary impacts will be a reduction/disruption in production capacity and increased operational costs.

Since 2011, the World Economic Forum has been leading a Supply Chain Risk Initiative to consider safeguards for global supply chains.  Among other priorities, it aims to:

  • More explicitly assess supply chain and transport risks as part of procurement, management and governance processes
  • Develop trusted networks of suppliers, customers, competitors and government focused on risk management
  • Improve network risk visibility, through two-way information-sharing and collaborative development of standardized risk assessment and quantification tools
  • Improve pre- and post-event communication on systemic disruptions and balance security and facilitation to bring a more balanced public discussion

 

Combining those with a Ten Point Checklist for Making Corporations Resilient and Asking the Climate Question: How to Create a Climate Adaptation Plan, would deliver a robust execution plan.

So, as you consider your supply chains, you might want to ponder if food shortages, fragile states, variable water supplies and the vagaries of emerging economies have affected it before, since these geopolitical, societal, environmental and economic factors are likely to be stressed simultaneously by climate change in the future.

Especially since these issues are likely to take priority for limited resources, it is worth considering how climate adaptation can be a collateral benefit of actions aimed primarily at nearer-term economic, geopolitical, societal and environmental factors.  If we don’t, twining these threats with accelerating climate change could collide in the next decade, delaying adaptation efforts while exposing companies to unpredictable financial loss from disasters.

 

North America -In the Eye of the Storm

As the East Coast grapples with the dire aftermath of Hurricane Sandy, a new study by Munich Re reveals that weather-related extreme events have most affected North America in recent decades. Research by the German reinsurer of 30,000 records of natural catastrophes showed such disasters have risen five-fold in North America over the last 30 years. For me, the Munich Re report, “Severe weather in North America," simply becomes the most recent reminder that climate adaptation must be a corporate priority. The report notes that the five-fold increase in weather-related losses in North America the past three decades compares with an increase factor of 4 in Asia, 2.5 in Africa, 2 in Europe and 1.5 in South America.  It also explains:

Anthropogenic climate change is believed to contribute to this trend, though it influences various perils in different ways. Climate change particularly affects formation of heat-waves, droughts, intense precipitation events and, in the long run, most probably also tropical cyclone intensity.

Past exchanges on this blog have been about extreme heat and precipitation, but perhaps the most germane for the moment is our discussion about Corporate Learning from Past Disaster.

It’s too soon to tell if Sandy has had a disproportionate impact on the private sector, but it’s likely that flood damage will net out a major cost to New York City’s businesses, even as Mayor Bloomberg and city officials consider infrastructure improvements to shore up against future storms.

Businesses newly committed to climate adaptation will find resources from peers with their own plans. They also may find good tools from government-backed organizations that discuss what climate adaptation looks like and, importantly, how to create an institutional commitment to climate adaptation.

Two that I especially like are:

“Private Sector Engagement in Adaptation to Climate Change,” a new report from the Organization for Economic Co-operation and Development

Making Cities Resilient:  My City is Getting Ready a guide for the United Nations International Strategy for Disaster Reduction, which I tweaked for a corporate audience here.

It’s likely the storm will prod corporate risk managers and business-continuity planning managers to take stock and begin instituting telecommuting policies, diversifying their supplier chain to other geographies and advising the small businesses upon which they rely about how to develop a resiliency or adaptation plan.

As Hurricane Sandy galvanizes us to examine more closely our climate adaptations, I’m inspired that you, readers, are taking leadership.

Green Buildings and Climate Adaptation

I’ve just discovered a nifty resource tailored to the corporate sector’s climate adaptation leadership, and I must share it.  It’s an appendix!  I’m all about capturing the information I need from a good executive summary, but anyone looking to  fashion a new building for their enterprise should take 20 minutes to skim Appendix C: Adaptation Strategies, within the report “Green Building and Climate Resilience,“ co-sponsored by the U.S. Green Building Council.

The report itself deserves a small celebration. Perhaps we’re witnessing an enhanced universal understanding of climate adaptation’s importance when the nation’s premier sustainable-built environment guide takes the issue on.

The report doesn’t directly address if some geographies and land uses will prove inadequate sites for their current land use because of anticipated climate-change impacts. These influences could be sea-level rise; increased frequency and intensity of flooding; pronounced stress on freshwater sources; and elevated incidences of wildfires. But the report does offer excellent recommendations for climate adaptation in the built environment.  (It’s arguable, for instance, that parts of Florida shouldn’t be sites for more shoreline development and that the arid Southwest shouldn’t be considered for high-water intensity land uses.)

Here are just a few considerations to pique your interest, with text from the report itself:

Prevent Flame/Ember Entry:  Eliminating exposed vents, installing oversized vents with mesh screens and placing vents in locations away from other buildings or vegetation may help to prevent ignition or damage during a wildfire.

Elevated First Floor: If it is not possible to build outside of a flood plain or a storm surge zone, the first floor of the building should be elevated well above the projected base flood elevation or storm surge height.  Elevating the structure will help to prevent damage during a flood from inundation, high velocity water, erosion, sedimentation and flood-borne debris.  

High Efficiency Egress Lighting: Energy-efficient lighting, including fluorescent lighting and LED lighting, lasts longer in exist signage and requires less amp-hours to run from a battery in the event of a power outage.

Sewage Backflow Preventer: A sewage backflow preventer allows wastewater to flow out in one direction but restricts the flow from reversing back into a building.  Access to sewer pipe should be incorporated outside of the building to allow easier access for cleanout in the event of a backup.

Areas of Refuge: Areas of refuge typically are designed to respond only to fires, but as the risk of sever precipitation and flooding increases, areas on the upper floors of buildings may need to be designated as hardened areas to protect occupants until help arrives.

Granted, many of these recommendations rely on a new skill set for building-design professionals, especially project engineers.  For instance, rather than referring to a table defining 5, 10, 30 and 100-year storm events that reflect the analysis of historic weather events that the engineer hasn’t ever done, design professionals now will analyze downscaled climate data* and make their own assumptions about storm events’ impacts on the built form.  I’m confident were up to the challenge.

Ten Point Checklist for Making Corporations Resilient

The United Nations International Strategy for Disaster Reduction has published an interesting guide:  Making Cities Resilient:  My City is Getting Ready. Its ten-point checklist for making cities resilient begs for a companion list.  I’ve added my two cents by developing a “Ten Point Checklist for Making Corporations Resilient.” http://www.unisdr.org/english/campaigns/campaign2010-2015/documents/campaign-kit.pdf

Ten-Point Checklist
For Making Cities Resilient (UNISDR) For Making Corporations Resilient
1 Put in place organization and coordination to understand and reduce disaster risk, based on participation of citizen groups and civil society. Build local alliances. Ensure that all departments understand their role regarding disaster risk reduction and preparedness. Include climate adaptation in a member of the C-suite’s job description. Establish a cross-function climate adaptation working group and connections with local and regional governments in key geographies in your enterprise – especially operations and supply chain.  Consider collaborating with key members of your supply chain, industry peers and neighboring businesses on climate adaptation planning and execution. Ensure that all departments understand their role regarding disaster risk reduction and preparedness.
2 Assign a budget for disaster risk reduction and provide incentives for homeowners, low-income families, communities, businesses and the public sector to invest inreducing the risks they face. Include budget lines for both proactive adaptation measures and recoup from extreme event.  Include climate adaptation in performance reviews for the C-suite, lieutenants and managers.
3 Maintain up-to-date data on hazards and vulnerabilities; prepare risk assessments; and use these as the basis for urban development plans and decisions. Ensure that this information and the plans for your city’s resilience are readily available to the public and fully discussed with them. Include climate adaptation in your emergency preparedness and continuity plans initially, with annual updates.  Ensure that this information and the plans for your corporation’s resilience are readily available to your leadership team and fully discussed with them.
4 Invest in and maintain critical infrastructure that reduces risk, such as flooddrainage, adjusted where needed to cope with climate change. Invest in and maintain critical infrastructure that reduces risk, such as flood drainage, snow removal, vector-borne disease prevention, and heat mitigation for workers and machinery, adjusted where needed to cope with climate change. Consider supply chain and building decisions with these risks in mind.
5 Assess the safety of all schools and health facilities and upgrade these asnecessary. Assess the safety of all facilities, especially those in locations vulnerable to extreme weather events (coastal, arid) and upgrade or move.
6 Apply and enforce realistic, risk-compliant building regulations and land-use planning principles. Identify safe land for low-income citizens and develop upgrading of informal settlements, wherever feasible. Engage with local governments to ensure that climate adaptation regulations protect residents and economic growth. Identify your most vulnerable employees (age, income, tasks, geography) and plan especially for their safety.
7 Ensure education programs and training on disaster risk reduction are in place in schools and local communities. Ensure education programs and training on disaster risk reduction are in place throughout your enterprise, not just for disaster preparedness, but also for heat exhaustion, vector-borne disease, and the like.
8 Protect ecosystems and natural buffers to mitigate floods, storm surges and other hazards to which your city may be vulnerable. Adapt to climate change by building on effective risk-reduction practices. Protect and enhance ecosystems and natural buffers in and near your holdings to mitigate floods, storm surges, extreme heat and other hazards.
9 Install early warning systems and emergency management capacities in your city and hold regular public preparedness drills. Install early-warning systems and emergency-management capacities in your enterprise and hold regular preparedness drills.
10 After any disaster, ensure that the needs of survivors are placed at the center of reconstruction with support from them and their community organizations to design and help implement responses, including rebuilding homes and livelihoods. After any disaster, ensure the needs of survivors are placed at the center of reconstruction.  See http://climateadaptationexchange.com/crisis-communications-are-you-ready-for-a-climate-related-crisis-in-your-business/ for communications guidelines.

 

Can Insurers Drive Corporate Climate Adaptation?

Can Insurers Drive Corporate Climate Adaptation? It’s been a tough year for insurance companies: blizzards in the Midwest, fires in the Southwest, severe tornados in the Southeast, a damaging Oklahoma hailstorm and flooding along hundreds of rivers.

And it makes me ask: Can the insurance industry drive a change in corporate behavior toward climate adaptation?  Judging from the September 2011 report, “Climate Risk, Disclosure by Insurers,” by the non-profit Ceres organization, the answer appears to be not yet.  The report notes that information from a limited number of insurers responding to a National Association of Insurance Commissioners survey found that the vast majority (88%) don’t even have a climate policy, let alone specific climate change–management investment policies in place.

But a changing climate demands that insurers price physical risk differently and manage for those new liabilities that threaten their investment portfolios.  The industry is focusing much of its attention on a narrow set of coastal risks, but as 2011 has demonstrated, extreme weather in the non-coastal U.S. is becoming costlier, too.

So what might it require for the insurance industry to change?  Since every catastrophe leaves lessons learned behind, we could be moving toward greater awareness sparking changes in the insurance market.  With each new extreme event, the disaster scenarios on which the industry models its risk become more realistic. And as a recent Bloomberg article makes clear, those models need to reflect a lot more than just wind, hail and water damage. They also should consider how communities tolerate risk and whether they invite it by allowing buildings to be sited in vulnerable locations.

That’s a concept that Swiss Re, which I consider a climate-adaptation leader, uses to manage its portfolio.  Swiss Re now speaks about climate risk – not climate change – to reflect its understanding that when natural disaster destroys the built environment, it’s not nature’s fault. Rather, it’s ours for building in the wrong place, the wrong way.  It maintains that the insurance industry should focus on “loss mitigation,” encouraging potential customers to keep their property from being destroyed in the first place.  (and by the way, Swiss Re is also capitalizing on climate adaptation as an opportunity: They've developed tailored insurance products, including weather risk insurance, for rural poor in developing countries).

Let’s hope that its influence trickles down to the rest of the market.

Building Site & Climate Resiliency

Building Site & Climate Resiliency  

When determining where to site a new building project, business executives usually base their decision on a short list of key criteria: the vibrancy of the local economy and hiring base; the adequacy of transportation and water resources; the strength of schools; and the diversity of housing.  “Resiliency” attributes – think community response to an extreme weather event – are usually overlooked (unless you’re locating offices in hurricane-prone Florida).

Ignoring such conditions today in site selection can prove shortsighted.  A recent conversation with Steve Adams, managing director of The Resource Innovation Group’s Climate Leadership Initiative suddenly brought this issue to the forefront for me.  Our conversation reminded me that developers and national corporate real-estate agents undoubtedly rank among the earliest climate-adaptation leaders in the corporate space.

 

These climate-adaption leaders should be looked to for counsel when siting a location.  They can identify possible crises that could occur with a site.  For instance, what happens if your cloud-computing operations are swept away from a flood or hurricane, especially abroad in developing countries ill-prepared for such an event?  As a result of that possibility, some companies are locating their cloud-computing operations off-shore.

 

Steve noted that some communities, such as a few along Florida’s Gulf of Mexico, successfully woo developers and corporations by marketing their response capacity, the depth of continuity planning and their track record at protecting economic loss from extreme weather.

 

I wager that business leaders’ short list of siting criteria soon will include a question or two that relate to preparation for, and response capacity to, extreme weather disruption. This might trigger broader demand for developers’ (and local governments’) adaptation thinking and action.  And if it doesn’t, insurability might. Increasingly, siting a structure in a questionable location can make it uninsurable or require it to pay higher premiums with a higher deductible.