Insights into Climate Change Adaptation by UK Companies

Transcription

1 Insights into Climate Change Adaptation by UK Companies March 2012 A report prepared for Defra by the Carbon Disclosure Project Carbon Disclosure Project [email protected] +44 (0)

2 Executive Summary In 2011 the Carbon Disclosure Project (CDP) was commissioned by the Department for Environment, Food and Rural Affairs (Defra) to assist in gathering evidence of the resilience of UK businesses in response to climate change. CDP has used data submitted by members of the FTSE 100 (89 companies in total) in response to the Investor CDP 2011 information request and CDP Water Disclosure 2011 information request to gather insights into business attitudes and action on adaptation. CDP analysed the responses to the strategy, risks and opportunities sections of the two questionnaires as these are most relevant to adaptation. Findings from the analysis of quantitative and qualitative data provided by responding companies are presented in this report, supplemented by observations on sector trends. CDP commentary provides insight into reasons behind the trends seen in the responses. Key findings include: 80% of directly responding FTSE 100 companies identify substantive risks to their business as a result of climate change, with the Utilities sector identifying the highest proportion of high significance risks. Many FTSE 100 companies operate internationally, and much of their physical risk perception and adaptation efforts are focused outside the UK. The metals and mining industry in particular perceives itself as particularly exposed to international physical climate risks. The utilities sector has a more national UK focus with an emphasis on rain/drought, snow/ ice, infrastructure, uncertainty in demand forecasting, and water availability. There is marked diversity between attitudes and approaches to risk and adaptation needs in different business sectors; of most significance is the distinction between companies with high tech facilities which focus on direct risk, and those such as consumer staples that are reliant on international supply chains and focus on indirect supply chain risk. The largest percentage of perceived business opportunities related to climate adaptation are identified as current; this suggests that expectations of a green economy in the future are influencing business decisions now. By contrast most of the perceived risks from the physical climate are expected to have impacts over a longer time period. For businesses, risks and opportunities are strongly linked. Many new business risks can also be seen as opportunities because there is the possibility of gaining competitive advantage through doing better than peers or by financially beneficial strategic repositioning. The quantification of the financial implications of risks and costs of adaptation by corporations appears to be quite poor, with many risks unquantified. As a result there is a potential that these risks will not be incorporated properly into corporate strategies. Companies are not necessarily using the term adaptation and are not clearly identifying adaptation practices as separate from their overall climate change responses. Less than half of responding FTSE 100 companies incorporate climate adaptation into their business strategies. Among those that do, the main focus is on assets, followed by logistics and finance. Engagement with policy-makers on adaptation is taking place and appears to have an effect on corporate awareness. However, overall there is very little of this type of engagement in comparison with the longstanding strong corporate participation in UK climate mitigation policy. CDP recommendations based on these findings are included in the Conclusion section of this report. 2

3 Contents Executive Summary 2 1. Introduction 4 2. Context 5 2.A The importance of adaptation 5 2.B The business case for adaptation 6 2.C UK Policy Context 6 3. Analysis 8 3.A Approach 8 3.B Risk Analysis 10 3.B.i What are the Risks: Overview 11 3.B.ii What are the Risks: Sector views 18 3.B.iii Adapting to the Risks 24 3.C Opportunity Analysis 26 3.C.i What are the Opportunities: Overview 27 3.C.ii What are the Opportunities: Sector views 36 3.C.iii Adapting to Opportunities 39 3.D Strategy Analysis 40 3.D.i Incorporating adaptation into business strategies 40 3.D.ii Engaging with policy makers on adaptation 42 3.D.iii Defra s Adaptation areas Corporate Case Studies 44 4.A About this section 44 4.B Case Study 1 - British Sky Broadcasting 44 4.C Case Study 2 - BT 46 4.D Case Study 3 - Standard Chartered Conclusion 50 5.A Key findings 50 5.B Recommendations 51 Appendix

4 1. Introduction In 2011 the Carbon Disclosure Project (CDP) was commissioned by the Department for Environment, Food and Rural Affairs (Defra) to assist in gathering evidence of the resilience of UK businesses in response to climate change. CDP is an independent, not-forprofit, organisation working to drive greenhouse gas emissions reduction and sustainable water use by business and cities. CDP operates the only global climate change reporting system, gathering data on company strategies and performance with regard to carbon emissions and water use. Defra leads on UK domestic climate change adaptation policy, with the Environment Agency as lead delivery body. As part of this work in 2011 Defra used the Adaptation Reporting Power to ask 911 key infrastructure providers to submit adaptation plans, in response to directions to report under the Climate Change Act This report by CDP is intended to provide additional information and context to Defra as a complement to the information gained through the Adaptation Reporting Power. The report looks at voluntary disclosures from the largest listed UK companies across a range of sectors. In this report CDP has used data disclosed to CDP by FTSE 100 companies in response to shareholder requests for insights into business attitudes and actions. CDP runs an annual reporting process on behalf of institutional investors, and gathers strategic business information relating to climate change and water. The CDP information requests ask companies about strategy, targets and initiatives, risks and opportunities, communications, measured emissions and water use. When analysing corporate responses for this report, CDP looked at the sections of the information requests which are most relevant to adaptation. The report, therefore, focuses on answers provided to questions about business strategy, risks and opportunities. The report is structured as follows: Introduction Context - The importance of adaptation, the business case for adaptation and UK policy context Analysis - Approach - Detailing the methodology used for the analysis - Risks Analysis - An evaluation of responses regarding physical climate risks - Opportunity Analysis - An evaluation of responses regarding physical climate opportunities - Strategy Analysis - An examination of strategies and engagement practices relating to adaptation Conclusion - Key Findings - Recommendations Appendix 1 - Table of companies included in the analysis A Supporting Information Document has also been prepared detailing the relevant CDP questions used for the research, including excerpts from the CDP reporting guidance document. Alternatively all questionnaires and reporting guidance documents are available in full on CDP s website ( 4

5 2. Context Climate change is impacting on the physical systems of the planet causing higher temperatures, loss of biodiversity, rising seas, increased risk of storms, floods and consequent economic losses. Since the 1970 s, the UK has experienced more frequent heat waves, more intense rainfall events and rising sea levels 1. This will impact directly on society and business. According to a 2010 report by the Adaptation Sub-Committee of the Committee on Climate Change, insured losses from weather-related events currently cost the UK an average of 1.5 billion each year. Two thousand people died in the UK as a result of the 2003 heat wave, an event that could become the norm by the end of the century, and the central England summer floods in 2007 cost the economy over 3 billion 1. Recent predictions suggest that climate change could cause 99 billion 2 in damage annually by 2030 and cost 1 million lives each year 3 globally. The Association of British Insurers predicts: Increases in global mean temperature will impact most directly on rain in Great Britain and the associated inland flooding. As a result of these changes in rainfall, average annual insured losses and the impact of a severe event are likely to increase. For example, the inevitable 2 C temperature change will increase average annual insured loss in Great Britain from inland flooding by 8% or by 47 million to 600 million. Association of British Insurers 4 2.A The importance of adaptation A certain amount of climate change is unavoidable. Due to inertia in the climate system, even if all emissions stopped today, greenhouse gases already released into the atmosphere will cause changes to the climate system for the next years. The IPCC broadly defines adaptation as any adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm or exploits beneficial opportunities 5. Adaptation is a vital part of any response to the challenge of climate change. It is the only way to deal with the unavoidable impacts of climate change which are already going to happen, regardless of our actions tomorrow, offering an opportunity to adjust economic activity in vulnerable business sectors and to support sustainable development 6. Adaptation seeks to increase resilience to climate change impacts by reducing vulnerability to climatic change and variability. A further important aspect of adaptation is to seek advantages and exploit opportunities arising from climate change. Proportionate climate adaptation makes sound business sense and should build on existing corporate assessment and environmental management. Confederation of British Industry 7 The Stern Review on the Economics of Climate Change 6 compared the economic costs of adapting to climate change to a business as usual approach of non-adaptation and found that adaptation will reduce the negative impacts of climate change on the economy. 1 Committee on Climate Change, How well prepared is the UK for climate change? 2 Original report states a figure of 157 billion in US Dollars. $157 billion equates to 99 billion (using xe.com as the currency converter) as of Red Orbit, 2010: Climate Change could cost 1 million lives a year by Association of British Insurers, Assessing the Risks of Climate Change: Financial Implications. 5 IPCC, Climate Change 2007: Synthesis Report. 6 The Stern Review on the Economics of Climate Change 2006: 7 Confederation of British Industries, Whatever the weather managing the risks from a changing climate. 5

6 2.B The business case for adaptation Business resilience is an important area of competitive differentiation. Businesses that adapt best to the challenge of climate change will be best placed to continue providing reliable and relevant services in an environment of physical, regulatory and commercial change. The successful business of the future is taking climate risks into account today and is developing adaptive strategies and actions to manage the associated uncertainties 8. In particular, the Insurance industry has an important role in climate change adaptation. The Association of British Insurers is looking at opportunities to create new products and services and has explored the role the insurance sector can play in influencing consumer behaviour 9. Insurance has a dual role with respect to adaptation. Access to insurance payouts can lessen the net adverse impacts of climate events on policy holders. At the same time, insurance is also an instrument aimed at incentivizing adaptations aimed at reducing climate risks. Properly set insurance premiums can, in principle, send appropriate signals to policy holders to undertake adaptation measures to reduce exposure to various risks, including those posed by climate change. OECD, Preparing for climate change today will reduce the costs and damage of a changing climate and allow UK businesses, the public sector, the third sector and individuals to take advantage of potential opportunities 11. When organisations embed climate risk in their risk management processes and decision making, they are more likely to develop the evidence base which will allow them to make the appropriate and most sustainable adaptation decisions 12. Timely intervention and adaptation in the UK is only part of the challenge for UK companies. Some of the largest effects in the UK will result from climate change elsewhere in the world, and UK businesses will be affected by global supply chains. UK manufacturing product chains are becoming highly complex and global in nature, increasing their vulnerability to climate change. For example, France and Spain, two of the UK s top trading partners, were among countries significantly affected by heat waves in the summer of C UK Policy Context The UK Climate Change Act 2008 introduced a new power (referred to as the Adaptation Reporting Power) for the Secretary of State for Environment, Food and Rural Affairs to direct reporting authorities to prepare reports on the current and predicted impacts of climate change on their organisation and proposals for adapting to climate change. Guidance published by Defra highlights the importance of adaptation and stresses that adaptation must become part of the way organisations carry out their functions: Adapting to climate change is not a single, one-off exercise. It is ongoing and needs to be embedded into the core of each authority s business, not undertaken as a standalone activity. Defra: Reporting Power FAQs UK Climate Change Impacts Programme, Acclimatise and CDP, The adaptation tipping point: are UK businesses climate - proof? 9 Acclimatise and CDP,(2009) Building business resilience to inevitable climate change. Carbon Disclosure Project Report OECD, Economic Aspects of Adaptation to Climate Change: Costs Benefits and Policy Instruments Committee on Climate Change, How well prepared is the UK for climate change? 12 Defra, Climate Change: Taking Action See Last accessed 10th February, 2011.

7 A recent report to Defra by PricewaterhouseCoopers entitled Adapting to Climate Change in the Infrastructure Sectors highlighted that the Adaptation Reporting Power is driving greater awareness of climate change risks and adaptation among infrastructure owners in the energy, transport and water sectors. The public nature of the reports allows their key stakeholders to scrutinise on how adaptation needs are being addressed. Infrastructure investment decisions are being made now with longterm consequences; these must be climate resilient investments. For example, Defra identifies recent spending on infrastructure developments: Last year, 118,000 houses were built; there was 48bn central government capital spending; and Network Rail announced 34bn of spending over the next five years. Demand for investment in economic infrastructure in the UK is expected to be in the range of billion until at least Defra: Adapting to climate change online material Infrastructure investment decisions are being made now with longterm consequences; these must be climate resilient investments. For example, The Committee on Climate Change s Adaptation sub-committee s second report, Adapting to climate change in the UK - measuring progress 15, demonstrates that there is still work to be done in maximising the UK s preparedness for climate change impacts. They reveal that while the UK is coping with the current climate, some sectors are nearing their resilience limits, whilst vulnerability continues to increase and strategic decisions are still not always made with climate change impacts in mind. Policy measures including tighter regulations, incentives and improved information, are needed to overcome barriers to adaptation in the private sector. 14 See 15 Committee on Climate Change Adaptation Sub-Commitee 2011, Adapting to climate change in the UK - measuring progress - 2nd Progress Report - 14 July

8 3. Analysis 3.A Approach The analysis has been performed on responses to the Investor CDP 2011 and CDP Water Disclosure 2011 questionnaire made by FTSE 100 companies. This sample has been selected as it represents companies that are potential leaders for private sector adaptation in the UK. The Investor CDP 2011 information request covers three major areas: Corporate management with regard to climate change Management s views on the risks and opportunities that climate change presents to the business Greenhouse gas emissions accounting The questions are grouped in four modules: Introduction Management Risks & Opportunities Emissions The questions in the CDP Water Disclosure 2011 information request are grouped in four modules: Introduction Water Management and Governance Risks and Opportunities Water Accounting Two specific areas of the two questionnaires have been identified as relevant for adaptation and have therefore formed the basis for the analysis: Strategy (part of the Management module, Investor CDP 2011) Risks & Opportunities (Investor CDP 2011 and CDP Water Disclosure 2011). Due to the nature of the questions of interest, all responses are qualitative, some are structured (responses selected from a pre-determined list of values) and others are free text. Where responses are structured, statements can be made regarding the number of companies responding in a particular way and this has been used to generate key graphics and statistics. Where responses are free text, a condensation analysis has been performed, breaking down the text responses to common themes. Inevitably this process contains some degree of subjectivity. Full texts of the selected questions, together with the guidance presented to companies are included in the Supporting Information document and more details on the approach taken for each are provided below. The Risks and Opportunities sections ask companies to describe the risks and opportunities that they have identified through the process reported in the strategy section. Not all risks/opportunities are necessarily reported; companies are asked to focus on those which have the potential to generate a substantive change in their business operations, revenue or expenditure. The risks and opportunities are assigned to three categories: (i) driven by regulation, (ii) driven by changes in physical climate parameters, and (iii) driven by changes in other climate-related developments. The analysis in this report focuses on risks and opportunities arising from physical climate impacts as these will be the key drivers for investment in adaptation. This analysis takes both a broad (cross-sector) and a sector specific look at company responses, using both structured and free text responses which identify: What physical climate parameters are driving the risks/opportunities; How direct and indirect risks/ opportunities are distributed; When they are expected to occur; What is the impact on the business; The significance of the identified risks/opportunities; The financial implications of identified physical climate impacts; Adaptation practices - management processes, methods and costs. The section on Strategy focuses on the processes and strategies that the responding organisation uses to structure its approach to climate change. The analysis in this report focuses on whether adaptation is integrated into their business strategy and how. It seeks to understand the level of private sector buy-in on adaptation, looking at: Do companies describe adaptation strategies as part of their overall climate strategy? If so, do they use the word adaptation in their strategy description? Which areas are being covered as part of their adaptation strategies? How do they engage with policy makers on adaptation? The section takes a broad (crosssector) approach to analysing these responses, and draws out specific examples and quotations to illustrate some of the key themes identified. The risks reported are inherent risks rather than residual (i.e. risks should be reported before management measures have been taken into account.) Companies can report multiple risks and opportunities. All quotations are provided as reported; validity and consistency of company response quotes have not been reviewed by CDP. Companies are given the option to disclose publicly or privately to CDP, where 8

9 private responses are only shared with signatories of CDP. Therefore private responses are only used as part of numerical analyses on an aggregated level in this study. The companies incorporated in the sample, along with the sector and industry structure is provided below in Appendix 1; the number of companies in each sector is described in Table 1 (Right). Note that CDP uses the Global Industry Classification System (GICS) for identifying sectors and industries. Table 1: Number of companies used for analysis in each sector Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Companies Insights into reporting practices: Variety in the quality of, and approach to, disclosure has a significant impact on the data and its comparability. In particular, companies are reluctant to disclose information which might provide insight to their future business strategies. There are also concerns regarding inconsistencies with other market information submitted on a global basis to various regulatory registries etc. There is a significant difference between inherent risks and residual risks (i.e. risks after management measures have been taken into account). Whilst companies are asked about inherent risks, some companies do not report all inherent risks and focus on residual risks. Companies have very different risk management and rating methodologies; what one company might refer to as a high risk is not necessarily reported as high in another company s response. Companies may not be reporting their full risk profile as they are asked to prioritize the most substantive risks. Management of direct risks is more internalized, and companies tend to be more aware of those risks. Furthermore, companies tend to group all indirect risks under a single supply chain or client driver category. Financial implications of identified risks are poorly disclosed across all sectors and companies. Such reluctance arises both from issues in financial transparency and difficulty in estimating relevant figures directly relating to particular risks. The selected sample size with a focus on UK based companies provided a good analysis for practices in the UK. However, the size of the data set made it harder to draw strong sector trends with regards to their climate adaptation activities. Company responses tend to focus on their mitigation practices. Furthermore, it is sometimes difficult to distinguish between mitigation and adaptation, especially with regards to energy efficiency activities. Companies are faced with many uncertainties in the markets in which they operate, both in the short and the long-term. Companies can be short-sighted in identifying risks and opportunities in comparison with time frames suggested by climate change adaptation. Although more companies identify opportunities in the short term, the disclosures are of poorer quality compared to those for risks, suggesting that they have not been fully explored. Companies submit a global response, therefore there may be regional differences in strategy that are not captured. 9

10 3.B Risk Analysis Investors are interested in adaptation efforts by the businesses in which they invest in as they can increase that company s resilience to future physical climate trends and shocks. Such actions are expected to enhance the likelihood of sustainable financial returns over time. This is particularly important for long term investors including pension funds. The need for more focus on the incremental changes in weather patterns when making investment decisions was highlighted in a report produced in 2009, Managing the Unavoidable: investment implications of a changing climate 16, published by three leading institutional investors. On the release of the report one of the UK s largest asset managers and member of the consortium, Seb Beloe, Head of SRI Research at Henderson Global Investors, commented 17 :...we as investors need to pay much greater attention to how climate change/weather affects our investment decisions. This will require paying attention to how climate change adaptation will affect company-specific business models, value drivers, strategy, governance, cash flows and assets. Seb Beloe, Head of SRI Research at Henderson Global Investors Responses to the CDP information request on risk provide insight for investors with regards to adaptation practices in companies and these responses are the focus of this chapter. Main data points are taken from Investor CDP 2011, where companies are asked to identify all relevant points for each risk they have identified by filling the table presented as below. Water responses are used to influence insights on relevant sectors (i.e. Health Care, Materials, and Utilities). Further details of the questions/response framework are provided both in relevant sections in this chapter, and in the Supporting Information document. Table 2: Risk table as presented to responding companies Risk driver Description Potential impact Timeframe Direct/ Indirect Likelihood Magnitude of impact Drop-down list: Free text Drop-down list: Drop-down list: Drop-down list: Drop-down list: Drop-down list: - Changes in mean (average) temperature - Changes in temperature extremes - Change in mean (average) precipitation - Change in precipitation pattern - Changes in precipitation extremes and droughts - Snow and ice - Sea level rise - Tropical cyclones (hurricanes and typhoons) - Induced changes in natural resources - Uncertainty of physical risks - Other physical climate drivers - Increased operational cost - Increased capital cost - Reduced demand for goods/ services - Reduction/ disruption in production capacity - Reduction in capital availability - Reduced stock price (market valuation) - Inability to do business - Wider social disadvantages - Other, please specify - Current years years - >10 years - Unknown - Direct - Indirect (Supply chain) - Indirect (Client) - Virtually certain - Very likely - More likely than not - About as likely as not - Unlikely - Very unlikely - Exceptionally unlikely - Unknown - High - Medium-high - Medium - Low-medium - Low - Unknown See Managing the Unavoidable: Understanding the Investment Implications of Adaptation to Climate Change., See Managing the Unavoidable: Understanding the Investment Implications of Adaptation to Climate Change., adapting%20to%20climate%20change.pdf

11 This chapter starts by providing an overview of the risks identified by FTSE 100 companies, then delves deeper into the individual sector trends, and finally analyses the adaptation methods being employed. Specifically it looks at the data provided on: What physical climate parameters are driving the risks, to allow an understanding of the climate variables that are responsible; How are direct and indirect risks distributed to evaluate company awareness of the need for adaptation in their own operations compared to their up- and downstream activities/relationships; When climate risks are expected to materialise; The nature of the impact on the business expected to arise from physical climate changes; The significance of the identified risks, derived from a matrix of likelihood of impact and expected magnitude; The financial implications of identified physical climate impacts; Adaptation practices employed, including management processes, methods and costs. The two companies in the Information Technology sector (see Appendix 1) did not identify any risks and therefore this sector cannot be included in the subsequent analysis 3.B.i What are the Risks: Overview 80% (71) of the FTSE 100 companies responding to Investor CDP 2011 identified risks driven by changes in physical climate parameters with potential to generate substantive change in their businesses. The Utilities sector has the highest ratio of number of reported risks per company, where 7 companies reported a total of 28 risks. What is driving the risk? The Fourth Assessment Report (AR4) of the Inter-governmental Panel on Climate Change (IPCC) 18 presents the results of an extensive climate modelling effort to predict changes in the global climate based on a range of development/emissions scenarios. Available drop-down options in the CDP questionnaire summarize the changes in the global climate system expected to develop during the current century, based on this report, in eleven categories (Figure 1). Further description of identified options can be found in the reporting guidance contained within the Supporting Information document. Figure 1: Risk drivers identified (number of risks and number of companies) Change in precipitation extremes and droughts Change in precipitation pattern Change in temperature extremes Change in mean (average) temperature Sea level rise Induced changes in natural resources Uncertainty of physical risks Tropical cyclones Other physical climate drivers Snow and Ice Change in mean (average) precipitation Number of companies Number of risks 18 IPCC Fourth Assessment Report: Climate Change 2007 (AR4), IPCC

12 Key points to note are: Identified risks are fairly evenly spread across all risk drivers. The number of companies reporting risks and the total numbers of risks reported follow a similar pattern, where `changes in precipitation extremes and droughts are the most commonly reported risk drivers. The top five risk drivers include temperature related drivers that are easier to predict, and also precipitation related drivers and sea level rise that are much harder to predict and therefore adapt to. Under the `other physical climate drivers category, most companies describe impacts of severe weather conditions and extreme weather events including droughts, heavy storms and lightning on their operations. Direct and indirect risks Table 3 and Table 4 present a breakdown view of reported risks showing the distribution of direct/ indirect risks across different sectors on a reported risk (Table 3) and company (Table 4) basis. Table 3: Breakdown of all reported direct and indirect risks by sectors Total number of reported risks Indirect (Supply Chain) Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Materials Telecommunication Services Utilities Direct 68% 50% 91% 75% 70% 92% 94% 100% 80% 31% 34% 23% 66% 18% 27% 34% 5% 28% Indirect (Client) 31% 34% 23% 66% 18% 27% 34% 5% 28% Table 4: Percentage of companies reporting direct and indirect risks by sectors Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Materials Telecommunication Services Utilities Total number of companies Direct 71% 80% 86% 79% 75% 50% 82% 100% 83% Indirect (Supply Chain) 50% 50% 0% 11% 50% 7% 18% 0% 33% Indirect (Client) 7% 20% 29% 42% 25% 7% 0% 0% 33% 12

13 Key points to note are: Direct risks, i.e. those associated with the company s own operations, are much more commonly reported than indirect risks across all sectors. With regard to the total risks reported, there is evidence to suggest that companies tend to group indirect risks together as one item, contributing to lower percentages seen in Table 3 for these risks. Indirect supply chain risks are mostly identified by the Consumer Staples and Consumer Discretionary sectors and to a lesser extent by the Health Care sector, reflecting their high dependence on suppliers and the potential for physical climate changes to impose risks on their supply security. Indirect client risks are mostly reported by Financials and Health Care sectors, although a relatively high awareness of this risk source is also demonstrated in the Energy and Utilities sectors. For Financial companies this reflects the diversity of sectors and geographies of their clients (e.g. insured companies, borrowers) who could face direct high risks in their operations and which will therefore have an inevitable impact on Financial companies performances. Health Care companies expect the health conditions to be significantly impacted by changes in physical climate parameters; therefore they expect increased demand for their services. While such conditions offer opportunities for the sector, they also pose risks as higher increases in Health Care service demand are expected in poorer geographies. Timeframe Companies were asked to identify when they anticipate the physical risks that they have identified will occur; the results are presented below. Figure 2: Risks across timeframes (percentage of reported risks) 27% 29% 25% 11% 8% Current 1-5 years 6-10 years >10 Unknown Figure 3: Risks across timeframes (percentage of companies) Current 1-5 years 6-10 years >10 Unknown 0% 10% 20% 30% 40% 50% 13

14 Both figures show clusters for current risks and risks that are expected in more than 10 years. 25% of reported current risks are identified by Financial sector companies due to increased risks to property assets impacting insurance costs and asset values, followed by Industrials and Utilities sectors at 22% and 17% respectively, due to increasing risks to their facilities from severe weather events. This reveals an interesting perception by companies that current extreme weather events are due to climate change. What the data does not reveal, however, is whether companies are aware of incremental changes in the risks that they are already experiencing over the decadal time period. In other words, companies may or may not be expecting the risks they are already experiencing to become more significant. Such perception is crucial to ensure that adaptation efforts are prioritized and appropriately designed and implemented. Almost 40% of the companies reported risks with unknown timeframes, which demonstrates another barrier to adaptation by companies. Most current risks derive from snow and ice and change in precipitation extremes and droughts while risks that are expected to materialize in more than ten years are derived mostly from sea level rise, change in temperature extremes and in precipitation extremes and droughts. Impact on the business Companies are asked to identify the nature of the impact on their business anticipated from the physical climate effects they have identified, selecting from a list of values provided in the questionnaire. More detail on each of those values is provided in the reporting guidance included within the Supporting Information document. The distribution of the expected impacts, as a percentage of all impacts reported and as a percentage of companies reporting, is presented in Figure 4. This shows that companies are identifying risks that would mostly either cause `reduction/ disruption in production capacity or `increased operational costs. Few businesses expect `wider social disadvantages and `reduced stock price (market valuation) to arise; a further option of `reduction in capital availability was not selected by any companies. Most companies mention disruptions to service delivery, or reduced quality in products or services being delivered in the `other category. Overall, the response data shows that companies are focusing on risks that would impact their own ability to perform their primary activities, and not focusing as much on risks to how they are perceived by investors and other stakeholders that would impact their market value and access to capital. Figure 4: Potential impacts of identified risks (percentage of risks and percentage of companies) Inability to do business Increased capital cost Increased operational cost Reduced demand for goods/services Reduced stock price (market valuation) Reduction/disruption in production capacity Wider social disadvantages Other 0% 10% 20% 30% 40% 50% 60% 70% % of companies % of risks identified 14

15 Significance of identified risks For analyzing the significance of identified risks based on the expected magnitude of their impact and probability of their occurrence, a risk matrix was used to classify risks into three significance levels: high, moderate, and low (see Figure 5 below). Figure 6 and Figure 7 present the distribution of risks with respect to their significance, as determined by the risk matrix, and the percentage of companies reporting risks in each significance category. Figure 5: Risk matrix used to identify significance Magnitude of Impact Probability of occurrence* Low Low-Medium Medium Medium-High High Virtually certain Very likely HIGH More likely than not MODERATE Likely About as likely as not Unlikely Very unlikely LOW Exceptionally unlikely (*) probability of occurrence values use those established by the IPCC. Figure 6: Distributions of risks with respect to their significance Figure 7: Percentage of companies reporting in each significance category 30% 26% Low Moderate 13% 31% High Unknown 0% 10% 20% 30% 40% 50% 15

16 Key points to note are: Almost a third of companies reported risks that are classified as unknown, due to uncertainty either of potential impacts or probability of occurrence. A need for a proper framework for analysing climate change risks is evident from such high levels of uncertainty across all sectors. Of those that are able to determine significance, most companies see their identified risks as having low or moderate significance. Both of the points above could cause companies to be hesitant to invest in adaptation. Figures 8 and 9 provide some insight into sector trends in perceiving risks from physical climate parameters, presenting the distribution of all levels of risks identified by companies within each sector Figure 8: Significance distribution across sectors (percentage of risks) Utilities Telecommunication Services* Materials Industrials Health Care Financials Energy Consumer Staples Consumer Discretionary Low Moderate High Unknown (*) Only 2 companies report from the telecommunications services sector. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of risks identified Figure 9: Significance distribution across sectors (number of companies) Utilities Telecommunication Services Materials Industrials Health Care Financials Energy Consumer Staples Consumer Discretionary Low Moderate High Unknown

17 Key points to note include: Utilities and Consumer Staples are the two sectors that identify risks of high significance for their businesses from physical changes to climate as presented by both figures. Highly significant risks reported by these sectors relate mainly to change in precipitation extremes, droughts and changes in mean (average) temperature. Health Care, Telecommunication Services, and Industrials are significant as they have the highest percentage of low risks identified (Note, however, that Telecommunication Services have a sample size of 2 companies and Health Care has 5 companies). The Consumer Discretionary sector trends show a lower proportion of high significance risks when assessed by number of companies compared to percentage of risks, due to the high number of risks in the high significance category reported by a few companies. The opposite occurs with the Financial sector when the number of companies reporting at least one high significance risk is higher than would be suggested by looking at the high significance risks as a percentage of all reported risks. Further details on the risks identified by all sectors are covered in the following sector-focused section to provide a better understanding on company perceptions of risks from changes in physical climate parameters. Financial Implications Companies are asked to describe the potential financial implications of their identified risks before taking action. The costs associated with these actions are analysed in the Costs of Adaptation section under 3.B.iii of this report. Companies are asked to provide qualitative descriptions in free text fields when responding to this question, and this chapter attempts to capture major themes across all sectors. Inevitably there is some degree of subjectivity in the findings as presented below. Most companies find it hard to quantify the financial implications of physical climate impacts on their businesses; only 15 companies out of the 71 identifying risks were able to do this. Where estimations have been made there are often high levels of uncertainty with large ranges of figures given. The three principle approaches used for providing a financial value to the risks are (a) referring to previous incidents, (b) describing current changes in value/costs, and (c) making projections for future values/ costs. The most commonly reported themes in the financial implications are increased insurance costs, increased costs due to damages to facilities or increasing energy needs, limited access to resources, interruptions to service delivery or production, and changes in consumer demand. Approximations of the number of companies reporting these risks, and examples of disclosures are given below. 5 companies out of 71, which identified risks from changes in physical climate parameters, mention increases in insurance costs among financial implications. Insurance costs adjust in line with market conditions but GSK s rates may rise faster if no demonstrable mitigation measures are in place. The financial risk to GSK is estimated at c. 10m. GlaxoSmithKline 23 companies out of 71 mention financial implications resulting from increased costs due to damages to their facilities or increasing energy needs in their operations. The financial implications vary according to the level in the business impacted on by the risk, but at Group level, on a worse case basis, the annual incremental cost could potentially range from 60 to 120 million. British American Tobacco At an upper limit it might be the cost of one building becoming virtually worthless, however improbable that might be, say 50 million. More likely is a few hundred thousand pounds to effect repairs post flooding. Land Securities Ten companies identify financial implications resulting from limited access to resources, or increasing costs due to rise in raw materials prices. Long-term changes in climate and extreme weather events may disrupt supply chain infrastructure and increase the costs of producing raw materials. For example, water shortages may impact on the availability/cost of plants for our garden centres, an increase in energy costs may lead to an increase in cost of manufactured products, a rise in fuel prices will lead to an increase in product transportation costs. Timber prices have increased by 35% in the past 18 months. Kingfisher 11 companies out of 71 report interruptions to their service delivery or production as having significant financial implications for their business. At one Serco location, severe precipitation caused extensive flooding around Gloucestershire resulting in one Serco business having to effectively close its operation for two weeks, resulting in hundreds of man days lost at a cost of at least 250,000. Serco Group 17

18 Over the past few years, there have been a number of storms, floods and extreme weather events which have caused damage to stores and interrupted normal trading, with a cost of over 7 million. Kingfisher 5 out of 71 companies identify changes in consumer demand as having significant financial implications on their businesses....we estimate that in any severe weather event in the UK, 10-30% of the resulting insurance claims will be made through RBS Insurance. In the Cumbria floods of 2009, we estimate that 40 million of claims were put through RBS, which was a major financial issue for us. Royal Bank of Scotland Group Failure to manage increased demand during extremes of cold weather would have a short term financial impact on the business and the potential for a long term reputational impact. To mitigate this, British Gas has worked to improve preparation for peak periods of demand, including the ability to draft in extra staff. British Gas 3.B.ii What are the Risks: Sector views This section takes a sector specific look at company responses using free text responses, and draws out specific examples and quotations to illustrate some of the key themes identified. The aim is to provide some more insight into trends presented in the previous section by focusing on each sector, and making use of qualitative data provided by companies. Descriptions of risk drivers, priority risk areas, and sector specific barriers to adaptation are presented. Water responses were used to influence insights for Health Care, Materials, and Utilities. CONSUMER STAPLES The FTSE 100 Consumer Staples sample in Investor CDP 2011 represents five different industries. There is a clear distinction between companies that mostly deal with distribution and sales (retail companies), and production (beverages, food products, household products, and tobacco) companies. While companies in retailing, operating mainly in the UK, consider themselves to be at risk due to expected difficulties in securing their supply chains, production companies operating globally face direct risks to their operations and products. This distinction between the production and sales side of the sector is crucial in assessing company strategies on adaptation. The only company which does not identify risk from climate change parameters is the UK retailer J Sainsbury Plc. It is important to note however, that Sainsbury s response suggests it actually reports its residual risks after management measures have been taken into account, rather than inherent risks. This is a common misunderstanding, as highlighted in the data limitations section. Sainsbury explains its efforts to diversify its supply chains, increasing the number of products that are 100% British year-round, and working closely with British farmers to support its efficiency improvements. Risks are mostly long-term but potentially of high significance - Only 20% of the reported risk drivers reported by four out of 10 companies are expected to materialize in the near future (i.e. current or 1-5 years). The only direct, near term high significance risk driver is reported by British American Tobacco: change in mean (average) temperature. In the longterm, companies consider change in precipitation extremes and droughts, snow and ice, and induced changes in natural resources, and sea level rise to be the direct risk drivers of high significance. 18

19 The change in the mean (average) temperature could affect all of our sites globally in varying degrees, as the hot weather results in a severe drain on local power supplies due to increased demand, mainly by cooling systems. This trend is likely to be made worse as global warming pushes up average temperatures and makes extreme heat waves a more common experience. Local power-rationing systems may become more common, as may unexpected power outages. We have experienced this in our operations in Pakistan, South Africa and Indonesia. General power quality and consistency could also be affected. The demand for water for irrigation is projected to rise in warmer climates, bringing increased competition and potential tension between agriculture and urban, as well as other industrial users which are in close proximity to our tobacco growing areas. British American Tobacco Disruption in crop growing cycles - Growing of crops is strongly influenced by the availability of water and changes in weather conditions. Therefore, change in precipitation extremes and droughts is the most common risk driver for the sector, impacting growing cycles, crop yield and availability. Change in mean temperatures will affect what agricultural crops are grown and where, causing a potentially significant shift in the supply base of our primary raw materials. It would also impact the maturation process for our whisky brands, as maturation speed is dependent on local temperature, possibly impacting product quality and volume. Diageo Plc Relocating production - Sea level rise and other weather related risk drivers are also mentioned by most companies as change in climate conditions or floods will force companies to relocate their production or require large investments to eliminate negative effects. Similar drivers also impose high significance risks in supply chains. Most companies in the sector try to diversify their production base and supply chains to different geographies to limit the risk of disruption. Tobacco growing is strongly influenced by the availability of water. We have 19 in-house leaf supply operations, a sample includes: Mexico, Brazil, Pakistan, Bangladesh, Nigeria and Cambodia. Climate change will modify rainfall, evaporation, runoff, and soil moisture storage; and this could have an impact on the tobacco growing cycle. Moreover, changes in total seasonal precipitation or in its pattern of variability in our key tobacco growing/ supply areas, could affect the tobacco crop yield and availability. Falling water tables and the resulting increase in the energy needed to pump water will make the practice of irrigation more expensive, particularly in a situation of long dry/hot spells or drought conditions as more water will be required per acre. Our transportation network and storage of supplies and finished goods could be affected by floods and other extreme weather conditions, resulting in supply chain interruption. The threat of damage due to extreme weather can result in the damage of stock as well as buildings, which in turn can lead to increased insurance costs if high claims experience results; and the potential loss of market share to competitors if the supply of product to the consumer is severely interrupted. Our business continuity management plans are designed to mitigate the consequence of supply chain interruption and disruption caused by building damage, and or stock/material damage. The societal impacts and response to climate change will vary between geographic areas. Migration may result from drought or flooding and this could lead to conflict and civil unrest, due to competition for diminished resources (food supplies and or water). Migration may affect the settlement patterns in leaf growing and processing areas, could affect our availability to attract skilled staff at peak operational times. British American Tobacco 19

20 ENERGY The Energy sector includes companies involved in the primary production and sale of energy (although not secondary energy generation which falls within the Utilities sector). The Energy sector in the FTSE 100 CDP sample represents two different industries: Oil, Gas and Consumable Fuels, and Energy Equipment & Services. While the former industry is engaged with the full cycle from extraction, refining and distribution, the latter are mostly focused service providers to the companies in the former sector. All Energy companies, except for BP, consider themselves to be at risk from physical climate parameters. Such high awareness is reflective of both the fact that the Energy sector is heavily dependent on available natural resources and weather conditions, and the government s focus on the energy sector through various regulatory mechanisms. It is clear from BP s response that they perceive risks from climate change, but currently are not ready to disclose risks at a global level. While BP is aware of the potential risks posed by a changing climate, we are also aware that the level of risk is highly location specific and best managed using well established local risk management processes. (...) For existing operations and all projects, we are in the process of updating guidance on adapting to a changing climate which describes a multi-step process from screening through to information gathering to possible adaptation plans. BP Long-term focus for serious damage - Most risks (60%) are expected in more than 10 years. However, many companies also mention current impacts of climate change that are already causing significant disturbance in their operations. Damage to facilities - A major concern for most of the companies in the sector is damage to their facilities. The companies depend on high-tech facilities for their operations in extraction and refining. Potential damage to such infrastructure will cause significant financial and operational impact for their businesses. Cairn Energy reports direct risks with high probability of occurrence and significant impact in their operations in Greenland and Bangladesh. For their Greenland operations; icebergs breaking off leads to risks to vessels and rigs, causing significant damage to infrastructure requiring additional maintenance costs and additional infrastructure investments to protect existing ones. Sea level rise and tropical cyclones in Bangladesh operations are damaging for facilities, thus disruption in operations and production capacity. Few indirect risks are identified - Very few indirect risks are identified by the companies in the Energy sector. Those that do are typically in the Energy Equipment & Services industry and thus the clients mentioned are energy producers themselves. Water scarcity - Water scarcity is an issue especially for operations overseas, in high water risk areas. In the context of the global response, however, water scarcity in the UK is seen as less of an issue. MATERIALS 20 The FTSE 100 Materials sector sample represents 3 different industries, although dominated by metals and mining. Most of these companies are listed on the London Stock Exchange however they primarily operate in non-uk regions. All companies, except for Johnson Matthey and Rexam, consider themselves to be at risk from physical climate parameters. Uncertainty with regards to timeframes of potential risks - 44% of the risks reported by 6 companies out of 10 had unknown timeframes, suggesting that companies are uncertain about the timeframe of their perceived risks. Among the reported timeframes, most risks are expected to materialize in the future (more than 10 years). It is evident from company responses that they have a long-term focus for expected serious damage to their operations and facilities. Anglo American s Minas-Rio Acu Port, from where we will export the majority of our iron ore once the Minas-Rio project is complete, has identified rising sea levels brought on by increased melting of land based ice (ice sheets, ice caps and glaciers) as a risk to the operation, but only in about 20 years. Anglo American

21 Water related impacts are important - Climate change is expected to impact on operational infrastructures and the availability of natural resources (especially water) with the potential to impact on the ability of companies to keep their current practices in place. Water scarcity is a recurring theme in company responses, reflecting the regions of operation (e.g. South Africa and South America) which are currently facing high water-stress. The most commonly reported risk drivers are change in mean (average) precipitation and change in precipitation extremes and droughts. Increasing need for additional heating and cooling - Many companies report increased preventive control mechanisms to avoid potential emissions and increased cooling/heating systems dependence both at offices and plants. They also mention the need to redesign their facilities to adapt to changing weather conditions. Disruption to supply chain transportation routes - The Materials sector is largely dependent on transportation and logistics systems as companies need to move significant amounts of materials to and from their facilities from all over the world. Therefore, climate impacts on their transportation routes would have a significant effect on their operations. Damage to facilities in extreme weather events - Company operations are largely dependent on high-tech, expensive facilities throughout the production cycle of materials. Any serious damage to facilities in the case of extreme weather events will have serious financial and operations implications for companies. The predicted increase in intensity of precipitations in the Sierra de los Andes during summer months could damage railway infrastructure, increasing operating costs for transport operations and monetary losses due to business interruption. The company could consider technical solutions such as track redesign and track restructure. ( ) Decreased water availability in the northern region could present risks to the company s water service facilities as changes to the region s water regime would increase costs by the need to compensate by increasing water exploration expenses, or supplying desalinated water from the ocean. Antofagasta UTILITIES The Utilities sector from the FTSE 100 sample responding to Investor CDP 2011 represents four different industries but is dominated by multiutilities. Unlike many of the other sectors, most of the companies in this sector have their operations in the UK. All companies, except for International Power, consider themselves to be at risk from physical climate parameters. International Power actually mentions risks from physical climate parameters, but does not report it as such, because it does not consider it as important as the regulatory risks it is facing. This is an example of where a company s prioritisation of risk reporting can affect the analysis. Variable risk drivers - The most commonly reported among the risk drivers are `change in precipitation extremes and droughts followed by snow and ice. The only direct current high significance risks are reported by Severn Trent and are driven by `change in mean temperature, `precipitation extremes and droughts, and `changes in precipitation patterns. Rises in average summer temperature increase demand for water resources and put pressure upon the strategic grid. This requires increased energy consumption for raw water pumping. Higher summer temperatures coupled with lower summer rainfall will lead to lower river levels. This may have an impact upon treatment and discharge requirements of sewage treatment works. Reductions in summer rainfall exacerbate the warmer summer temperatures as water resources are not replaced. Increases in winter rainfall will put pressure on combined sewer systems and may lead to more sewer flooding. This has an impact on our customers, and on our regulatory obligations. Intense summer convectional rainfall will lead to an increase in sewer flooding from combined sewer systems. Heavy rainfall, particularly after long, dry periods are likely to lead to inundation of assets, posing a risk to the supply of water and waste water services and a financial risk via the cost of recovery. Severn Trent 21

22 Damage to infrastructure - Severe weather events are expected to have an impact on existing infrastructure, increasing maintenance and insurance costs. Facilities on the coasts are also mentioned, as sea level rise is expected to have an impact, and has already caused instances of sewer flooding, as mentioned above in Severn Trent s response. Difficulties in demand forecasting - Unexpected weather conditions, and an inability to forecast demand are two of the most significant problems the sector is facing. As emissions rise and climate impacts begin to unfold, such uncertainty could be expected to worsen in the future. Water - Two companies report water availability as a major issue in the UK. Flooding is also a recurring concern among the responding companies. For example, in their response, Centrica reported that flooding in 2008 at Brigg & Killingholme (UK) stations was significant financially. CONSUMER DISCRETIONARY The FTSE 100 Consumer Discretionary sector sample, listed in Appendix 1, represents five different industries. These companies are diverse in their offered services and operations so it is harder to draw general conclusions on the sector s response to climate change. Nevertheless, some insights from company responses are presented below. Few risks of high significance - Only two companies report risks that fall under the high significance category based on expected impact and magnitude. A good example of current risks is presented below by Intercontinental Hotels Group; it also demonstrates how companies invest in thinking about climate change risks today in order to future proof their businesses. We anticipate that precipitation extremes and droughts will impact on existing hotels and will influence where we site new hotels due to unavailability of water which is central to our customer offerings. Intercontinental Hotels Group Inability to do business - A significant portion of the sector is composed of Hotels, Restaurants & Leisure companies. This industry is highly dependent on the existing climate conditions. If a particular geography and its climate are affected significantly by climate change, reducing its attractiveness for the consumers to visit, the facilities will be unable to continue their businesses. Therefore, most companies mention such uncertainty risks posed by climate change on their existing businesses and facilities. Impact on supply chain - Most companies mention their dependence on their supply chains, thus are aware of possible impacts to their supply chains that will require significant change to their operations. FINANCIALS The FTSE 100 Financials sector sample in Investor CDP, as listed in Appendix 1, represents four different industries. Most companies, with the exception of two, perceive risks from changes in physical climate parameters. Reported risks are equally distributed among all listed drivers. Risks to investee operations - Financial sector companies are aware of the increasing physical risk to their asset portfolio, having the potential to affect the financial returns on their investments. Increasing insurance costs are also being reported by Asset Management companies. Similarly, Commercial Banks that financially support different sectors through credit, also perceive greater credit risks due to possible damage to their borrowers facilities/operations. Physical damage to facilities - This is another recurring theme for financial companies, as many have significant numbers of office facilities covering a broad range of locations. Risk management in an uncertain climate - The Insurance industry within the Financial sector is unique when considering risk, as it s core business is dependent on risk management, including risk from weather conditions. Thus how insurance companies perceive climate risks, and how they integrate this new risk category in their business, can be indicative of private sector perceptions. 22

23 The other area of climate change risk is, of course, our general insurance area which accounts for 40% of our operating profit of our worldwide business; including UK, Northern Europe, Turkey and Canada. Our analysts are able to model weather events, which can directly or indirectly affect most classes of business, but primarily our domestic and commercial property business. For this business, in most cases, weather perils claims are experienced separately, in order to more accurately set the appropriate level of reserves for past accident months. Based on expected volumes of business, we will also project forward the expected claims experience up to 18 months into the future. It is longer than the length of general insurance contracts that we hold. Aviva HEALTH CARE The FTSE 100 Health Care sector sample, listed in Appendix 1, represents two different industries: Health Care Equipment & Supplies, and Pharmaceuticals. 3 out of the 4 companies perceive risks from changes in physical climate parameters. No risks have been reported under the high significance category. Impact on clients - The Health Care sector identifies risks arising indirectly through their clients as physical changes in climate are expected to impact health demand. Such demand shifts will not only affect their business processes and profitability in vulnerable areas, but also may require shifts in operations or transportation network due to geographical shifts in health care demand. Opportunities, as well as risks, are identified by companies due to expected change in demand for health care services (see Opportunities section of this report). INDUSTRIALS The FTSE 100 Industrials sector sample in Investor CDP, listed in Appendix 1, is very diverse and represents seven different industries. Eight out of the 14 companies perceive risks from changes in physical climate parameters. Only one risk has been reported under the high significance category. Vulnerability of facilities - There is a huge diversity in products and services offered by the Industrial sector and therefore it is hard to identify common themes across the sector. Where companies operate in big high value facilities, they report risks from potential damage to their facilities and from increasing operational costs due to high energy prices. TELECOMMUNICATION SERVICES The FTSE 100 Telecommunication Services sector sample in Investor CDP, listed in Appendix 1, consists only of two companies. No risks have been reported under the high significance category. Severe weather conditions - Severe weather conditions are expected to have an impact on telecommunications equipment, with the potential for network disruptions. Demand management - This is another issue for telecommunication services, as extreme weather conditions cause a significant increase in demand for their services. 23

24 3.B.iii Adapting to the Risks 9 out of 89 companies (10%) report that they have a specific climate change risk management process, whereas 78 (88%) report that risk management is integrated into multi-disciplinary companywide risk management processes. 3 companies (3%) report they have no documented processes for assessing and managing risks and opportunities from climate change. Management methods There is a broad range of management, or adaptation, methods reported however some commonalities can be seen amongst groups of sectors whose operations and risks are similar. These are summarised below. Sectors that are more dependent on their supply chains (e.g. Consumer Staples, Consumer Discretionary, Health Care), and mostly operate in retails stores/buildings commonly use the following techniques: Diversification of the supply chain geographically and continuously ensuring availability of alternative suppliers; Capacity building together with their suppliers, to secure their supply chains in the long-term; Engagement in research projects with universities to understand their supply chain vulnerabilities; and understand best methods for adaptation. Such investment in research projects is a strong indication that companies think that adaptation is an increasingly important issue for them; Employment of robust insurance programs for their facilities; Work with all stakeholders for longterm sustainability; Facility and store assessments across company stores, generating manuals for sustainable stores and overall management practices. Sectors that are operating in expensive high-tech facilities or operating high-tech networks see potential damage to those facilities as a significant risk (e.g. Energy, Materials, Utilities, Telecommunication services, industrials) and employ the following methods: Employment of robust insurance programs, with increased insurance premiums; Climate Risk Management frameworks designed to address their assets and projects, and forward-looking climate change impact assessment studies for their operations. Again, this investment in research projects is a strong indication that adaptation is an increasingly important issue; Enhanced monitoring programs and infrastructure upgrades; Disaster management plans and increased preventive controls; Forward-looking natural resources plans, especially around water availability. The Finance sector, which is a little different from the sector groups above, uses the following methods for management: Diversification of their investment portfolios on the basis of climate risks; Joining the discussion on linking investment performance and sustainability; Focusing on property investments and their operating facilities with an emphasis on facility management and minimizing the physical risks from climate change; Insurers are heavily involved in quantifying the level of risk to adjust to the new conditions, which will be imposed by climate change. Therefore, they invest in research projects for creating knowledge around climate change the potential risks resulting from it. Costs of adaptation Companies mostly suggest that costs of specific adaptation activities are hard to report, as they are integrated into facility and other management costs. However some companies do report some level of approximation on their costs, and below are some quotes which illustrate such responses. It is however important to note that, these costs are not necessarily relate to climate change adaptation, and include all activities to reduce climate related impacts on their businesses. Actions reported by companies for climate adaptation include collaborative studies and external consultancy services, improving facility infrastructure or technology used for business processes, risk and/ or demand management systems. Approximations of their prevalence in response and extracts of disclosures are provided below. 14 companies out of 71 invest in research and collaborative studies to understand potential costs associates with climate change risks. Such investments suggest that companies think climate change poses potentially significant risks for their business, and increasingly need to understand more details on what those risks might be. 24

25 The financial risk of unexpected sea level rises is an inability to get our future product to market. In order to better the understand these risks, Anglo American contracted the UK Met Office to simulate various scenarios that will that will result in the rise of sea levels of varying degrees of severity. The study also took into account the socio-economic impacts over time. Even the highest impact scenario indicated that sea level rises would be relatively small and not pose a significant risk in terms of the current design of the port. The cost of study was 100,000. Anglo American The additional cost for managing indirect physical risks is difficult to quantify as we integrate this into core risk management processes and raise awareness of climate related risks amongst frontline banking teams and credit risk professionals. We have spent approximately 200,000 on producing research, and training business and credit teams on climate change related risks over the last three years. Barclays In terms of risk management, we have costs associated with insurance to safeguard the business assets, in the advent of the adverse/extreme weather events. With regards to ensuring that we have a sustainable supply of leaf in relation to all physical changes from climate impact, to help us better understand and manage our environmental impacts and opportunities, we have invested 1 million from , and from 2006 to million each year in the BAT Biodiversity Partnership. British American Tobacco One of the activities we have completed to manage this risk is an evaluation of all priority raw materials and their exposure to climate-change related risk. This evaluation identified our top six most critical agricultural commodities (cream, sorghum, barley, grapes, agave, and sugar) and defined the risk factors that affect them now and in the future. We then selected one of these six (cream) and have launched a pilot program to improve the sustainability of supply for our Baileys Irish Cream product. The costs of our activities to-date to manage this risk have been approximately 100,000. Diageo Plc 3 companies report recovery services or demand management to avoid impacts of potential risks from changes in physical climate parameters. We pay around 1.5 million annually for Disaster and Business Recovery services to cover our business interruption risks. Capita Group 12 out of the 71 companies report the costs of investments in new product developments or in facility upgrades including new technology investments to deal with potential climate change impacts. To date, costs associated with these actions have been in the order of 10 million, mainly for installation of water efficiency measures, and water treatment and reuse technology. Diageo Plc Last year we undertook a project to insulate water pipes in 1000 of our branches to prevent them from bursting during extremely cold weather, the occurrence of which is likely to increase with increased climate change. The cost to the business of fixing each burst water pipe in 2009 was between 2000 and 5000 including all the associated remedial work. Lloyds Banking Group It is difficult to quantify the overall investment in this area [or build capacity for consideration of climate change into our investment process as those involved have exposure to different areas as well, but a conservative assessment (taking account of salaries, membership fees, commission etc) would be 200,000. Schroders 7 companies report that there are no additional costs associated with adaptation activities, as all are covered by business as usual financial plans. 25

26 3.C Opportunity Analysis Another focus for interest in adaptation for investors is the market for new products or services which can provide new investment opportunities. There is evidence of asset managers capitalising on this opportunity already. Examples from the top UK asset managers include Schroders Global Climate Change fund which aims to provide capital growth primarily through investment in equity securities which will benefit from efforts to accommodate the impact of climate change, and Jupiter s Global Fund - Climate Change Solutions 19 - whose objective is long-term capital growth from investments in companies that provide products or services that contribute to environmental improvement and facilitate adaptation to the impacts of climate change. Investors see significant potential in these funds; for example, regarding its Global Climate Change fund 20, Schroders states that we believe that over time companies well positioned with regard to climate change will significantly outperform broad world indices. Responses to the CDP information requests provide insight for investors with regard to investment opportunities in adaptation and these responses are the focus of this chapter. The main data points are taken from Investor CDP 2011; CDP Water Disclosure 2011 responses are used to influence insights into relevant sectors (i.e. Health Care, Materials, and Utilities). Companies are asked to identify all relevant points for each risk they have identified by filling the table presented as below: Table 5: Opportunity table as presented to responding companies Risk driver Description Potential impact Timeframe Direct/ Indirect Likelihood Magnitude of impact Drop-down list: Free text Drop-down list: Drop-down list: Drop-down list: Drop-down list: Drop-down list: - Changes in mean (average) temperature - Changes in temperature extremes - Change in mean (average) precipitation - Change in precipitation pattern - Changes in precipitation extremes and droughts - Snow and ice - Induced changes in natural resources - Other physical climate drivers - Reduced operational costs - Reduced capital costs - Increased demand for existing products/ services - Premium price opportunities - Increased production capacity - Increase in capital availability - Increased stock price (market valuation) - New products/ business services - Investment opportunities - Wider social benefits - Other, please specify - Current years years - >10 years - Unknown - Direct - Indirect (Supply chain) - Indirect (Client) - Virtually certain - Very likely - More likely than not - About as likely as not - Unlikely - Very unlikely - Exceptionally unlikely - Unknown - High - Medium-high - Medium - Low-medium - Low - Unknown See Jupiter Climate Change Solutions Fund, February 2012 update See Schroder Global Climate Change Strategy Overview, March

27 This chapter focuses on the responses to questions on physical climate opportunities (see the Supporting Information document for full question guidance). It starts by providing an overview of the opportunities identified by FTSE 100 companies, then delves deeper into the individual sector trends, and finally analyses the methods being employed to maximise those opportunities. Companies are asked to identify all relevant points for each opportunity they have identified by completing the opportunities table, similar to the risk section of the questionnaire. The chapter follows the same format as the risks analysis and looks at the data provided on: Which physical climate parameters are driving the opportunities; How direct and indirect opportunities are distributed; When physical climate opportunities are expected to materialise; The nature of the (positive) impact on the business expected to arise from physical climate changes; The significance of the identified opportunities, derived from a matrix of likelihood of impact and expected magnitude; The financial implications of identified physical climate opportunities; The management methods and costs for maximizing the opportunities. All are collected as separate data points within the CDP information request and all, with the exception of the last two bullets, are collected as structured qualitative data, with additional descriptive free text provided. The two companies in the Information Technology sector (see Appendix 1) did not identify any opportunities and therefore this sector cannot be included in the subsequent analysis. 3.C.i What are the Opportunities: Overview 72% (64) of the FTSE 100 companies responding to Investor CDP 2011 identified opportunities driven by changes in physical climate parameters with potential to generate substantive change in their businesses. The Telecommunication Services and Utilities sectors have the highest ratio of the number of reported opportunities per company, where 14 out of 22 and 6 out of 10 companies respectively, reported a total of 22 and 10 opportunities, showing the highest levels of awareness of opportunities from climate change. What is driving the opportunity? The Fourth Assessment Report (AR4) of the Inter-governmental Panel on Climate Change (IPCC) 17 presents the results of an extensive climate modelling effort to make predictions of changes in the global climate based on a range of development/emissions scenarios. Available drop-down Figure 10: Opportunity drivers identified (number of opportunities and number of companies) Other physical climate opportunities Change in mean (average) temperature Change in precipitation extremes and droughts Induced changes in natural resources Change in precipitation pattern Change in temperature extremes Snow and Ice Change in mean (average) precipitation Number of companies Number of opportunites 27

28 options in the CDP questionnaire summarize the changes in the global climate system expected to develop during the current century based on IPCC s Fourth Assessment Report in eleven categories (Figure 10). Further description of identified options can be found in the reporting guidance in the Supporting Information document. As shown in Figure 10, when looking at all identified opportunities they are seen to be mostly based on `Change in mean temperature and `Other physical climate opportunities. Within the latter category, companies mostly mention their competitive advantage gained from their ability to adapt to a new climate, in particular focusing on adapting to extreme weather conditions and events. The same pattern is seen when looking at the number of companies identifying particular opportunities. Direct and indirect opportunities Table 6 and Table 7 below present the reported direct and indirect opportunities across different sectors. Note that Table 6 presents the breakdown of all opportunities reported, where one company can report more than one opportunity. Table 7 shows the percentage of companies that reported at least one opportunity for the relevant category. Key points to note from the tables are: Direct opportunities, i.e. those associated with the company s own operations, are much more common than indirect opportunities across all sectors, with the exception of Consumer Staples and Health Care. Indirect supply chain opportunities are mostly identified by Consumer Staples companies, and to a lesser extent the Consumer Discretionary sector, reflecting their close relations with suppliers and the potential opportunities from physical climate changes. Table 6: Breakdown of direct and indirect opportunities by sectors Total number of reported opportunities Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Materials Telecommunication Services Utilities Direct 76% 46% 92% 77% 25% 63% 100% 100% 90% Indirect (Client) 12% 0% 8% 19% 75% 32% 0% 0% 10% Indirect (Supply Chain) 12% 54% 0% 4% 0% 5% 0% 0% 0% Table 7: Percentage of companies reporting direct and indirect opportunities by sectors Total number of companies Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Materials Telecommunication Services Direct 71% 60% 100% 58% 25% 29% 73% 100% 67% Indirect (Client) Indirect (Supply Chain) Utilities 14% 0% 71% 26% 25% 29% 0% 0% 17% 14% 40% 0% 5% 0% 7% 0% 0% 0% 28

29 Indirect client opportunities are mostly reported the Health Care and Industrials sectors. Health Care companies expect that the health conditions will be significantly impacted by changes in physical climate parameters, therefore they expect to derive significant opportunities from their clients with increased demand for their services. Indirect client opportunities show a different pattern from indirect client risks especially for the Financial sector. Companies in this sector perceive significant indirect risks associated with clients, while they find it harder to identify opportunities. Timeframe Companies were asked to identify when they foresee that the physical climate opportunities that they have identified will occur; the results are present in Figures 11 and 12 below. Figure 11: Opportunities across timeframes (percentage of opportunities) 12% 23% 39% Current 1-5 years 6-10 years >10 12% 14% Unknown Figure 12: Opportunities across timeframes (percentage of companies) Current 1-5 years 6-10 years >10 Unknown 0% 10% 20% 30% 40% 29

30 It is interesting to note that the majority of companies report that they are currently experiencing opportunities from physical climate impacts. This suggests a high awareness amongst companies, especially in the Consumer Discretionary and Financials sectors, of the green economy opportunities and proactive attempts to capitalise on this now. These two sectors see opportunities in (i) cost savings from energy-efficient implementations resulting from adaptation and mitigation strategies, and (ii) investment opportunities in businesses that will support climate adaptation. Water scarcity in many countries, is affecting key industries such as thermal power, steel manufacturing, paper and pulp plants and cement manufacture. This provides opportunities for those businesses engaged in providing solutions - such as desalination, water efficiency, water distribution, manufacture of pipes/pumps, waste water treatment projects and irrigation projects. HSBC Holdings Plc. Impact on the business Companies are asked to identify the nature of the impact on their business anticipated from the physical climate opportunities they have identified, selecting from a list of values provided in the questionnaire. The distribution of the expected impacts, as a percentage of all impacts reported and as a percentage of companies, is presented in Figure 13 below. It shows that companies are identifying opportunities that would mostly either cause `increased demand for existing products and services, or to a lesser extent, `reduced operational costs. Figure 13: Potential impacts of identified opportunities (percentage of companies and percentage of opportunities) Increased demand for existing products/services Reduced operational costs New products/business services Other Increased production capacity Investment opportunities Reduced capital costs Premium price opportunities Wider social benefits 0% 5% 10% 15% 20% 25% 30% 35% 40% Percentage of companies Percentge of opportunities 30

31 Significance of identified opportunities For analyzing the significance of identified opportunities based on the expected magnitude of their impact and probability of their occurrence, an opportunity matrix was used to classify opportunities into three significance levels: high, moderate, and low (see Figure 14 below). Figure 14: Opportunity matrix used to identify significance Magnitude of Impact Probability of occurrence* Low Low-Medium Medium Medium-High High Virtually certain Very likely HIGH More likely than not Likely MODERATE About as likely as not Very unlikely LOW Exceptionally unlikely (*) probability of occurrence values use those established by the IPCC. Figures 15 and 16 present the distribution of opportunities with respect to their significance, as determined by the opportunities matrix above. Figure 15: Distribution of opportunities with respect to their significance Figure 16: Percentage of companies reporting in each significance category 17% 18% Low 15% 50% Moderate High Unknown 0% 10% 20% 30% 40% 50% 31

32 Interesting points to note are: Companies show higher levels of awareness of the potential likelihood and magnitude (and therefore significance) with respect to the opportunities they identify compared to the risks, as presented in the previous chapter; Of those that are able to determine significance, most companies see their identified opportunities as having moderate significance. Figure 16 and Figure 17 provide an insight into the sector trends in opportunities from physical climate parameters, presenting the distribution of all levels of opportunities identified by companies within each sector. The Utilities, Consumer Staples, Consumer Discretionary, and Materials sectors identify opportunities for their businesses of high significance. While the Materials sector seems to have a high percentage of highly significant opportunities, all these high opportunities are identified only by 2 out of 11 materials companies. Further details on the opportunities identified by all sectors are covered in the following sector-focused section to provide a better understanding of company perceptions of opportunities derived from changes in physical climate parameters. Figure 16: Significance distribution across sectors (percentage of opportunities) Utilities Telecommunication Services* Materials Industrials Health Care Financials Energy Consumer Staples Consumer Discretionary Low Moderate High Unknown 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of risks identified (*) Only 2 companies report from the Telecommunications Services sector. 32

33 Figure 17: Significance distribution across sectors (number of companies) Utilities Telecommunication Services Materials Industrials Health Care Financials Energy Consumer Staples Consumer Discretionary Low Moderate High Unknown Financial Implications Companies are asked to describe the potential financial implications of the opportunities presented by changes in physical climate. Companies are asked to provide qualitative descriptions in free text fields when responding to this question, and this chapter attempts to capture major themes across all sectors. Inevitably, however, there is some degree of subjectivity in findings as presented below. While companies generally find it hard to quantify the financial implications of physical climate advantages for their businesses, some attempt to estimate opportunities arising from new products/services resulting from increased demand, reduced costs, new markets and/or products, and gaining competitive advantage from better adaptation. It is important to note that most new products reported are not offered directly to promote adaptation, rather they focus on promoting efficiency. 33

34 7 out of the 64 companies that have identified opportunities see an opportunity from changing demand for their existing products or services....if we get it right then we could significantly improve our ability to attract and retain tenants, maybe improving income by 1-5 million. Land Securities Our regional agricultural financing portfolio in Africa is now valued at over USD 2 billion and we have partnered with the German Development Bank (DEG) to deliver USD 130 million of financial support to Africa s agricultural sector over the next three years. This example, therefore, shows how we are managing the opportunity of changes in climate change parameters and the costs required. Standard Chartered The potential implication arising from changes in physical climate may be an increase in revenue as a result of increased demand for our core product and opportunity for continued growth. BG Group Increased demand for air conditioning in the UK will bring increased electricity demand and therefore increased revenue. Scottish & Southern Energy 8 out of the 64 companies who have identified opportunities reported reduced costs from their operations achieved due to physical climate changes. We believe that Green Engage can help hotels to avoid significant cost through ensuring site location is considered and consideration of local surrounding is made on a regular basis. SABMiller Helping customers understand and prepare for the impacts of climate change helps build relationships as well as reducing the cost of weather related insurance claims. We guide customers on how they can protect their homes from the physical risks of climate change; provide home insurance cover for solar panels, wind turbines and generators as standard; and help customers when they are impacted by severe weather events. Lloyds Banking Group 34

35 14 out of the 64 companies, reported opportunities from new products or services. Climate change may open to GlaxoSmithKline new markets associated with preventative products. This market has the potential to account for more than 100 million. GlaxoSmithKline The primary opportunity from physical risks is financing for measures to adapt to climate change and investments in enhanced climate resilience, across the client spectrum from governments and municipalities, commercial clients and personal customers. There are a range of estimates for adaptation costs over the next few decades. The UNFCCC has estimated annual global costs of adapting to climate change to be $ billion but other research has suggested that this is a significant underestimate and real costs are closer to $ billion range. Despite uncertainty, it is clear that adaptation to climate change will require the mobilisation of hundreds of billions of dollars of investment. Barclays can play a role in enabling both public and private sector clients to access funding. Given the scale of investment required, it is likely that international capital markets will play an important role, providing a role for financial intermediaries like Barclays to develop innovative solutions for adaptation. Barclays 3 out of the 64 companies see an opportunity in adapting to changes in physical climate in creating a competitive advantage in their markets. Our planning and risk mitigation efforts are more effective than those of our competitors. This is especially true in our supply chain where we have the opportunity to develop a flexible supply of grains that can adapt to supply disruptions. Diageo Plc 35

36 3.C.ii What are the Opportunities: Sector views The sector analysis section looks at main themes in opportunity drivers, identifies priority areas, and pulls out good examples for each sector. It is important to note that, opportunities identified are reported much more poorly than risks, and it is harder to identify key themes and details from responses. CONSUMER DISCRETIONARY The FTSE 100 Consumer Discretionary sector sample in Investor CDP 2011, listed in Appendix 1, represents five different industries. These companies are diverse in their offered services and operations so it is harder to draw general conclusions on the sector s response to climate change. 79% (11 out of 14) companies see opportunities from changes in physical climate parameters. Increased efficiency - Concerns around potential changes in physical climate change parameters drive efficiency investments, which allow cost reductions. However, such investments often reflect mitigation strategies as well as adaptation strategies, and it can be hard to separate out the two motivations. Increased demand for sustainable products - Consumer interest is expected to grow for low-carbon products. Most companies mention expected interest for online services. CONSUMER STAPLES The FTSE 100 Consumer Staples sample in Investor CDP 2011 represents five different industries. There is a clear distinction between companies that mostly deal with distribution and sales (retail companies), and production (beverages, food products, household products, and tobacco) companies. 90% (9 out of 10) companies see opportunities from changes in physical climate parameters. New area for competition - Companies see the difficulties their sector will be facing due to risks in their production sites and supply chains as an opportunity; it allows them to differentiate themselves from their competitors, and offers a new degree of competition. Potential for new production sites - Climate change might offer new production sites due to physical impacts, which could be more costeffective than existing ones. 36

37 ENERGY The Energy sector includes companies involved in the primary production and sale of energy (although not secondary energy generation which falls within the Utilities sector). The Energy sector in the FTSE 100 CDP sample represents two different industries: Oil, Gas & Consumable Fuels, and Energy Equipment & Services. While the former industry is engaged with the full cycle from extraction, refining and distribution, the latter are mostly focused service providers to the companies in the former sector. 71% 5 out of 7) companies see opportunities from changes in physical climate parameters. New reserves - Melting ice may lead to increased access to potential reserves in cold regions. Increases in temperature and shorter winters are also expected to ease working conditions in Nordic regions. Increased demand for sustainable energy sources - Such increasing demand offers a new energy business area for renewables and natural gas. MATERIALS The FTSE 100 Materials sector sample in Investor CDP 2011 represents three different industries, although dominated by Metals & Mining. Most of these companies are listed on the London Stock Exchange however they primarily operate in non-uk regions. 82% (9 out of 11) companies see opportunities from changes in physical climate parameters. New area for competition - Companies see additional risk for their businesses as an opportunity if they succeed to position themselves correctly, with appropriate business strategies. Furthermore, energy efficiency investments allow for reduction in costs. FINANCIALS The FTSE 100 Financials sector sample in Investor CDP, as seen in Appendix 1, represents four different industries. 75% (15 out of 19) companies see opportunities from changes in physical climate parameters. New investment opportunities - There are increasing opportunities to invest in adaptation projects in partnership with the government and private sector. Insurance products are among most commonly reported. Financial solutions to manage weather risks include weather derivatives and catastrophe bonds, offering opportunities for our investment banking business. Adaptation to climate change, investing in building climate resilience and climate proofing infrastructure will all require private capital, offering opportunities for Barclays. Barclays The increasing frequency of extreme weather events is creating opportunities for HSBC to provide consumers and businesses with insurance that protects them against such events. Increases in the number and severity of weather catastrophes are expected to cause damage costing between $80 and $120 billion a year between 2010 and HSBC Holdings Plc. We are a leading insurer of the renewable energy industry with a significant share of the global market. Our main propositions include wind, bioenergy, solar and small hydro insurance and we are expanding into emerging technologies such as tidal, wave and geo-thermal energy. RSA Insurance Group 37

38 UTILITIES The Utilities sector FTSE 100 sample responding to Investor CDP 2011 represents four different industries but is dominated by multi-utilities. Unlike many of the other sectors, most of the companies in the Utilities sector have their operations in the UK. 67% (4 out of 6) companies see opportunities from changes in physical climate parameters. Warmer winters - Increasing temperatures are expected to reduce the cost of maintenance, disruptions and workforce costs. Increased demand - Demand for key services offered by utilities companies, especially electricity use, are expected to grow, offering growth opportunities. HEALTH CARE The FTSE 100 Health Care sector sample in Investor CDP, as seen in Appendix 1, represents two different industries: Health Care Equipment & Supplies and Pharmaceuticals. 20% (1 out of 4) companies see opportunities from changes in physical climate parameters. Impact on human health - Climate change is expected to have a significant impact on human health, offering business opportunities in most parts of the world for the health care companies. INDUSTRIALS The FTSE 100 Industrials sector sample in Investor CDP, as seen in Appendix 1, is very diverse and represents seven different industries. 57% (8 out of 14) companies see opportunities from changes in physical climate parameters. Increased demand for low carbon products - Low carbon products are seen as a key area in which industrials companies can compete. Reduced costs - Concerns around potential changes in physical climate change parameters drive efficiency investments, which enable reductions in costs. However, such investments often reflect mitigation strategies as well as adaptation strategies, and it can be hard to separate out the two motivations. TELECOMMUNICATION SERVICES The FTSE 100 Telecommunication Services sector sample in Investor CDP, as seen in Appendix 1, consists only of two companies. All (2 out of 2) companies see opportunities from changes in physical climate parameters. Reduced costs - Concerns around potential changes in physical climate change parameters drive efficiency investments, which enable reductions in costs. However, such investments often reflect mitigation strategies as well as adaptation strategies, and it can be hard to separate out the two motivations. 38

39 3.C.iii Adapting to Opportunities Management methods There are a small range of management methods reported and these methods are generally related to mitigation opportunities such as cost reductions through increased energy efficiency, or increased demand for services that are aimed to reduce consumers footprint (e.g. efficiency technology, renewable energy etc.). There are very few companies that report their management methods for the opportunities identified for adaptation. Examples were most common amongst companies involved in the production of goods on agricultural lands, as presented below: SABMiller has an alternative crop growing strategy well underway across the operations in Africa, Asia and Latin America. These programmes are aimed at growing crops that have the potential to reduce the reliance on malting barley and its vulnerability to climatic changes in the medium to long-term. These plants are sorghum, maize, and cassava which may be used as adjuncts or as a replacement of malting barley. During the past year, over 28,000 farmers were engaged in our smallholder programmes across the world. We also buy crops grown by over 1,500 smallholder farmers in Ghana, and 4,500 smallholder farmers in Zimbabwe, as part of our minority venture there. The crops grown are either aimed at supplementing part of traditional brewing materials or entirely replacing them to form new products/brands. SABMiller Opportunities could reduce the costs of food production for our suppliers and therefore the costs to us of sourcing those products. Distribution costs may also be reduced if food products can be grown closer to our markets. We aim to build strong, long-term relationships with our suppliers and continually monitor our supply chains. To help us do this we get regular feedback from our suppliers, and the results of our annual survey of suppliers form one of our Group key performance indicators. These relationships will ensure that we are well placed to identify the effects of a changing climate on supply at an early stage, and find ways to benefit from any opportunities. Tesco Costs of adaptation As mentioned above in the management methods section, companies mostly focus on costs associated with savings from energy efficiency improvements that are primarily related to mitigation rather than adaptation. However some companies report they either have no additional costs for adaptation, give examples of study costs to exploit opportunities, or investments to improve operations or facilities. Approximations on prevalence of each of these common themes, along with examples, are provided below. 8 companies out of 64 reported study or consultancy costs they have invested in to understand their business opportunities. The consultant costs associated with the latest flood risk assessment work are 10k for the initial screening, 2k for each property up to 20k for further modelling work. British Land Company Five companies reported investments in their operations and facilities for adapting either for enabling new products, or making their operations more resilient. Our regional agricultural financing portfolio in Africa is now valued at over $2 billion and we have partnered with the German Development Bank (DEG) to deliver $130 million of financial support to Africa s agricultural sector over the next three years. This example, therefore, shows how we are managing the opportunity of changes in climate change parameters and the costs required. Standard Chartered The cost of product development and launch of green insurance products is estimated at $1 million. HSBC Holdings plc The costs associated with taking action varying depending on the project but usually have a maximum of 7 years payback. We have invested 240 million over the past three years in the development of our sustainable broadcasting facility... British Sky Broadcasting 6 companies out of the 64 indicated that the costs of adaptation add no additional burden to their businesses, as such opportunities are already covered as part of their business as usual financial plans. 39

40 3.D Strategy Analysis Strategy responses are of importance for investors as robust risk management processes and business strategies with regards to climate change issues provide a reliable indication of good overall management and understanding of risks. This can give confidence to investors that both risks and opportunities will be appropriately identified, evaluated and managed, therefore increasing the potential for a good return on their investment. As part of the Investor CDP 2011 information request, companies were asked to (i) identify and describe their risk management procedures with regard to climate change risks and opportunities, (ii) state whether climate change is integrated into their business strategy, and if so describe in detail, and (iii) explain their engagement process with policy makers on issues related to climate change, and actions they are advocating. All of these responses are captured in text fields as part of the online questionnaire. For the purposes of this research, these questions can help to discover the level of awareness and activity around adaptation within the sample of companies and the degree to which forward looking business strategies for adaptation are in place. 3.D.i Incorporating adaptation into business strategies The majority (89%, 79 out of 89 companies) report that climate change is integrated into their business strategy, however only 17% (15) of companies specifically mention an adaptation strategy. Looking more closely at the responses, however, reveals a further 29% (26) of companies that mention adaptation related strategies without specifically referring to them as adaptation. This indicates two things: (i) that companies are not necessarily identifying with the term adaptation and are not clearly identifying adaptation practices as separate from their overall climate change responses; (ii) evidence of incorporating adaptation related strategies into the overall business strategy is present in less than half (46%) of the responses. It should also be noted, however, that distinguishing between actions taken to adapt to physical risks of climate change, and action taken to mitigate, can be difficult and a degree of subjectivity by the analyst is inevitable. The figure below presents distribution of companies that reported adaptation strategies with regards to integration of climate issues into their overall business strategies. Figure 18: Company responses showing integration of adaptation strategies 11% Not integrated 43% 17% Clear adaption strategy integrated Adaption type strategies integrated 29% Other climate change related strategies integrated 40

41 Sectors with a high dependence on high-valued assets and facilities, such as the Materials, Energy and Industrials (in part), sectors generally have a risk management process in place for their facilities. However, in most instances, they do not label their processes as adaptation. They have been managing physical risks in their facilities already and this is not necessarily seen as directly linked with climate change. However, they do show high levels of awareness of possible impacts of physical changes to climate. As an example, Royal Dutch Shell has a detailed risk analysis for their assets and is planning for a strategy for adaptation, although this is yet to be integrated into their overall business strategy. This illustrates how companies are just beginning to get to grips with adaptation: The world s climate is changing with, albeit still poorly understood, implications for Shell. Basing decisions on historical climate information is no longer robust. The changes, some of which are already starting to be observed, are expected to include changes in prevailing weather patterns as well as changes in extreme weather events. At present the full technology required to understand all impacts of climate change on our assets or new projects in all regions is not available, but good information is available in some regions and it is planned to use this as a pilot to investigate how climate change adaptation will be undertaken in the future. In parallel, capacity in climate change and adaptation are planned to be built into this area to ensure that the skills, techniques and data are available to develop these types of criteria routinely for all new projects. We are planning to undertake screening of existing assets and new assets and estimation of their exposure to physical climate change and associated cost of adaptation. This work is expected to be completed over the next few years at the end of which we will have a clearer understanding of the costs associated with adaptation. Royal Dutch Shell Sectors that are heavily dependent on their supply chains or agricultural production (i.e. Consumer Discretionary and Consumer Staples), show high awareness to risks from potential disruptions to their supply chain and/or production facilities. Most companies, however, fail to label their activities as adaptation. The following quote from Marks & Spencer, stands out among the others as they do mention adaptation specifically when describing their business strategy. The process is as described under 2.1a and has identified risks of cost, asset protection, business continuity and supply chain continuity. This resulted (outcomes) in the setting of climate change targets in 2007 which were updated in 2010 and include commitments to: Have carbon neutral operations by 2012; Improve energy efficiency by 25% by 2012 and 35% by 2015; Improve fuel efficiency by 20% by 2012 and 35% by 2015; Trial a range on onsite renewable technologies and procure 100% renewable electricity; Test and develop low carbon delivery vehicle technologies; Conduct climate change adaptation reviews of our retail operations and supply chains; Develop new low carbon products and business opportunities; Distribute free home energy monitors and home insulation to all employees; Use new refrigeration technologies to reduce resultant emissions by 50% by 2015; Develop supply sustainability frameworks including climate change key performance indicators (KPIs). Marks & Spencer RB is exposed to anticipated physical impacts of climate change; we currently consider these to have a reasonable potential (in aggregate) to present potentially material financial &/or non-financial risks and opportunities (R/O), in terms of likely impact on our net revenue. Identified R/O relate specifically to changes in precipitation patterns, frequency of extreme weather events, and in the availability and costs of goods & services.these aspects therefore influence our strategy and climate change programmes. Reckitt Benckiser Tobacco growing is strongly influenced by the availability of water, as well as access to well managed land. We have 19 inhouse leaf supply operations, a sample includes: Mexico, Brazil, and Cambodia. Climate change will modify rainfall, evaporation, runoff, and soil moisture storage and this could have an impact on the tobacco growing cycle. The demand for water for irrigation is projected to rise in warmer climates, bringing increased competition and potential tension between agriculture and urban, as well as other industrial users in proximity to our tobacco growing areas. Water is one of our key environmental performance indicators due to our dependency on water in tobacco leaf growing and processing, as well as for cigarette manufacturing. The Group s water use in 2010 was down by 5.9% from 2009 to 4.15 cubic meters per million cigarettes produced, exceeding our 2012 reduction target of This improvement in efficiency was contributed in part to conservation measures (water reuse). In 2010 we hosted a stakeholder dialogue session attended by external experts and BAT employees, on the challenges posed by water; and the techniques required to address them. British American Tobacco 41

42 The UK Utilities sector is particularly interesting in the context of adaptation as most of the UK companies in this sample were invited to report to Defra under the Adaptation Reporting Power. All of the companies in this sector show high levels of awareness to adaptation, covering all essential areas for their businesses. It is also important to note that the Utilities sector has the strongest tendency to label its strategies as adaptation in responses; this may be a sign of a positive impact of Defra s reporting request on company awareness levels. Within the Financial sector, adaptation awareness is observed with regard to its impact on determining insurance premiums, and their assets management. Telecommunication services companies highlight their business strategies to promote new services aimed to ease adaptation. 3.D.ii Engaging with policymakers on adaptation 84% (75) of the responding companies report that they engage with policy makers to encourage further action on mitigation and/or adaptation, however only 19% (17) are engaging on adaptation. Figure 19 below presents the percentage of companies from each sector which engage with policy makers on adaptation. From the Financial sector, companies mention their activities in partnership with DECC and Defra. They also take part in other business initiatives such as Corporate Leaders Group on Climate Change, Capital Markets Climate initiative, Green Property Alliance; and participate in consultations on government directives. RSA hosted a meeting with the UK Government Climate Change Adaptation Minister and business leaders on the implications of adaptation to climate change. We continue to lobby the UK Government for adequate spending on flood defences, changes to planning regulations to reduce building on flood prone areas and changes in building regulations; and in partnership with WWF we are working to encourage planners and local and national government to support sustainable drainage systems (SuDS) as part of a cost-effective, integrated approach to flood and waste water management. We produced a report, launched early in 2011 at the House of Commons, highlighting the risks and practical solutions. In Copenhagen, we engaged the local Government on protection from floods. RSA Insurance Group Figure 19: Distribution of companies engaging with policy makers on adaptation across sectors Utilities Telecommunication Services Materials Information Technology Industrials Health Care Financials Energy Consumer Staples Consumer Discretionary 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of companies Engagement with policy makers on adaption No engagement on adaption Note: Sectors that have low company numbers and therefore are less reliable include: Information Technology, Telecommunication Services and Health Care. 42

43 Utilities companies mention their participation in Defra adaptation reporting both during its pilot and mandatory phases, and mention their close collaborations with government organizations such as Ofwat. 3.D.iii Defra s adaptation areas Company responses detailing their strategies were reviewed against Defra s six areas to consider when looking at managing risks and opportunities from the climate 21. These six areas are: Assets - impacts on premises, building design, construction, maintenance and facilities management; Logistics - vulnerability of supply chain, utilities and transport arrangements; People - implications for workforce customers and changing lifestyles; Process - impacts on production processes and service delivery; Markets - changing demand for goods and services; Finance - insurance costs, availability and cost of finance, investor pressure. Figure 20 below shows the percentage of companies that (a) mention at least one of the six areas either as part of their adaptation strategy or (b) do not mention adaptation actions as part of their business strategy but do include identified risks from physical climate parameters and details on management methods to avoid such risks in response to risk questions 5.1c and 5.1h (see the Supporting Information document for relevant CDP questions with guidance in full), or (c) do not mention any adaptation strategies. The results show that most of the companies fail to report adaptation strategies. Furthermore, a significant portion of companies do not mention adaptation, even if they have climate strategies in place. Another important finding from the company responses is that companies are most successful in identifying adaptation strategies in the Assets area, followed by Logistics and Finance. Figure 20: Distribution of adaptation strategies reported across different areas Finance Markets Processes People Logistics Assets report strategies & mention adaption report strategies, but do not mention adaption no strategies 0% 20% 40% 60% 80% 100% Percentage of companies 21 launched at 11/01/

44 4. Corporate Case Studies 4.A About this section As part of the research project with Defra, CDP has worked with companies listed in the UK to create case studies that reflect and bring to life some of the analytical findings in this report. The companies were chosen to illustrate a diverse range of risks and opportunities. They were selected from sectors which were not asked to report by Defra under the Adaptation Reporting Power, so provide additional insights to enrich existing UK corporate data. 4.B Case Study 1 - British Sky Broadcasting British Sky Broadcasting (BSkyB) provides entertainment, news, sport and movies to over 10 million customers and is in one in three homes in the UK and Ireland. It has 16,500 employees and a turnover of almost 6 billion. Challenge: Ensuring a reliable and cost-efficient source of rare earth metals One of the major climate change related concerns for BSkyB lies in its supply chain and the reliable sourcing of natural resources, such as precious metals needed for its set-top boxes and other electronic devices. The few geographic locations from which most of these rare metals are sourced are often at the greatest risk from dramatic weather patterns and natural disasters caused by climate change. It is difficult to remove, or replace with an alternative, the key materials in the manufacturing process or reduce reliance by sourcing from a variety of locations. The floods in Thailand were one of the recent events which affected supply and drove up costs for rare earth minerals. The availability of the resources impacts on the company s production and difficulties in transportation drive up costs further. The extent of the financial implications for the company depends on the severity and how long service might be interrupted. Unpredictable weather patterns, such as the severe winters experienced in the UK in the last few years, present problems for BSkyB in ensuring staff can reach offices and that call centres, many of which are in Scotland, remain open. With growing consumer awareness of climate change issues and the increasing demand for energy efficient products, the company needs to be competitive in the goods and services it offers. This means being energy efficient in its own operation and demonstrating leadership in adapting to climate change. 44

45 Solution: Innovative recycling and developing a closed-loop supply chain Central to BSkyB s policy in adapting to the climate change risks it faces, is guaranteeing its supply chain. Products are sourced, when possible, from a number of geographical locations. These include China and Romania and a stock management system ensures that the company has sufficient if flow is interrupted for a period of time. But the company is taking an active and inventive approach to how it uses and reuses the materials and precious metals it needs. It has a proactive process in place to reuse and recycle all its products returned to Sky through its engineers or freepost. By using waste and taking back and re-using elements from its products, it hopes to create its own dependable closed-loop supply chain. The company has worked with suppliers to conduct a Life Cycle Assessment of its products which considers design, production, distribution and usage. It has led to a reduction in the materials used in production which also helps to reduce costs and as a result, a UK producer now makes BSkyB s satellite dishes from recycled cars, which at the end of their life are again recycled. BSkyB also works with suppliers and business partners to ensure that products and services are delivered in the most energy efficient ways, again reducing operational cost in the short and medium term. Inspiring action and minimising operational impact is at the core of the Executive Environment Steering Group (EESG) chaired by Chief Executive Jeremy Darroch which meets every eight weeks to assess risks and identify opportunities. It sets company-wide strategy and ensures that it is integrated into everyday activities. On an annual basis the Reputational Risk Review, through a series of workshops involving over 60 people from across the business, identifies risks which are then continually reviewed and monitored. Fiona Ball, Head of Environment, affirms that BSkyB has a fully integrated company-wide risk management process. At BSkyB we regard sustainability as more than a marginal exercise. It s central to our overall business strategy, making our operations more robust and efficient, and building deeper relationships with our customers and business partners. This leads to not just a profitable and successful company today, but one which creates sustainable value over the long term. Our climate change strategy is reviewed on a six weekly basis by our EESG, chaired by our CEO Jeremy Darroch. In efforts to reduce the impact of severe weather in the UK there is training for all engineers to cope with driving in hazardous conditions. IT systems and video conferencing is used to enable employees to work from home and a fleet of shuttle buses help those that need to get to an office. Wider transport policies include employees being encouraged to use the train rather than flying. As consumers become more climate change aware BSkyB recognises that to succeed it must meet the more sophisticated demand and also take a leadership role. This brings additional reputational gains in attracting and retaining talented staff and building relationships with like-minded organisations and suppliers. It is only with its own house in order that the company, as a broadcaster in one in three homes in the UK, can use its position to educate and inspire wider action on climate change. Its partnership with WWF is helping to save a billion trees in the rainforest in Brazil and, through its media channels, BSkyB has raised over 1m with customers. 45

46 4.C Case Study 2 - BT BT is one of the world s largest providers of communications solutions and services operating in more than 170 countries. Its principal activities include networked IT services, local, national and international telecommunications services, and higher value broadband and internet products and services. Challenge: Enforcing short and long-term planning to minimise the physical risks presented by climate change and meeting stakeholder expectations BT acknowledges that it is exposed to physical risks in all 170 countries in which it operates due to extreme weather conditions as a result of climate change. These can lead to rising operational costs, risk to the company s reputation with network disruption, damaged equipment, customer complaints, employee injuries and absences. The significant impact of these issues often arises not from a single incident but from an aggregation of many incidents, an effect witnessed in the UK from severe winter in 2010/11. In addition to more frequent extreme weather events, as temperature regimes change, seasons are likely to shrink or lengthen, affecting precipitation patterns and increasing the likelihood of prolonged extreme weather. Extreme high temperatures can lead to rising operational costs in cooling network and IT infrastructure. During periods of extreme weather use of BT s services dramatically increases making it difficult for the company to predict and resource. BT s network of five 999 emergency call centres has typical weekday volumes of around 65,000 calls from the public but during the very heavy snowfalls in January 2010 the number of 999 calls leapt an average of 18% higher and at times volumes reached 30% above normal levels. Widespread flooding across the UK in 2007 caused an additional 31,000 customer complaints and cost BT approximately 9m in operational insurance claims. The severe flooding in Cumbria in November 2009 required around 200 BT engineers to work around the clock in difficult conditions to restore full services, with an estimated 36,000 broadband customers affected. More than 35 engineers from other regions were seconded to the area in the following weeks to support the clean-up effort. The key financial implications for the company are that it may fail to meet revenue targets or customer service targets, causing damage to brand value and service level penalties; rising operational costs such as overtime, higher unit repair costs, customer complaints and insurance claims. In the long-term BT expects to see the need for increased insurance cover with associated increased premiums and BT s ability to manage physical risks has helped to mitigate losses. Stakeholders including consumers, business customers, suppliers, investors, governments and communities, are calling for BT to demonstrate its commitment to tackling climate change. If the company fails to deliver in line with expectations it also risks damaging its brand value and reputation. This concern has driven BT s belief that long-term profitable growth can only be achieved if the company adapts and acts responsibly in everything it does. Solution: A fully integrated multi-disciplinary company-wide management processes to monitor, manage and adapt Responsibility for assessing the risks and opportunities regarding climate change within BT is taken at the highest level. A committee chaired by Sir Michael Rake, Chairman of BT, including non-executive directors, independent members, and key executives, sets the global strategy for the BT Group for approval by the Board. It monitors, manages and reports on mitigating climate change impacts and adapting business to reduce risk exposure to the direct impacts of climate change such as severe weather. These risks are identified at a company-wide, global level and managed though a comprehensive strategy. A Corporate Responsibility (CR) Risk register describes each risk and identifies the risk owner and manager. The scope of these risks is inclusive covering reputational risks, physical risks from severe weather, regulatory risks and behaviour change 46

47 across all stakeholders and the communities in which they operate. It is updated at least twice a year by the CR Risk Forum made up of risk and sustainability experts from across the business and reviewed annually by the BT Board and the external Leadership Advisory Panel, chaired by well-known green campaigner Jonathon Porritt. Eric Anderson, Senior Sustainability Manager, for the BT Group, commented, Our drive for a better future by being a responsible and sustainable business leader, is embedded into our company strategy to build a better business. To adapt for extreme climate impacts within its Business Continuity planning BT has revised its severe weather plan and appointed a lead role for environment projects within the Business continuity team. Improving the reliability of products and services reduces the problems that customers experience, and making the physical network infrastructure more resilient to disruption from severe weather helps to reduce costs of additional maintenance visits and the associated travel. Benefits are being noted and since 2007 there has been a 37% drop in carbon emissions associated with site visits to repair the network, along with corresponding reductions in costs and complaints from loss of service and costs. The company recognises that it is exposed to intense rainfall risk, and not simply floods breaching river banks. It therefore tracks average rainfall on a regular basis and maps it against fault rates. Measurements show the fault rate is only slightly higher in periods of heavy rainfall suggesting this risk is manageable. BT is carefully choosing locations for its switching centres for its new 21C network to adapt to increasing flooding and severe weather conditions and prevent the difficulties experienced in recent years across the UK. The new locations have minimal risk of flooding from potential sea level rises associated with climate change and are away from flood plains identified by the Environment Agency. BT has also worked with the Environment Agency across the UK to help communities and helping to double the number of homes and businesses that receive flood warnings. Investment is also being made in making the underground network more resilient to flooding and preventing damage to cables from water ingress by replacing old water resistant joints with new more effective joints. An ongoing programme is removing blue bean connectors in the BT network which don t work when they come into contact with moisture. Over 14m of the 108m blue bean connectors in the total network have been replaced to date. These improvements together with other operational efficiencies mean that on average Openreach, which looks after the first mile of network from the exchange through to homes and businesses, now experiences a fault once every 13.6 years as opposed to 9 years when Openreach was formed in In order to plan for increased average temperatures BT has an energy and efficiency programme to reduce its energy costs for cooling. Replacing inefficient fan motors to increase the effectiveness of chilled air and reducing the load on air conditioning units generates annual energy savings of 13m from an investment of 17m used to install 22,000 smart meters and an advanced smart control network to optimise heating and cooling at major sites. The system has reduced cooling costs by 40 per cent across the first 1200 sites, delivering improved temperature reliability and improving customer service. BT uses free air cooling, where geography allows, bringing in external fresh air to help subsidise the powered cooling used in equipment rooms. The location of a new data centre in Italy was chosen so that a naturally replenished waterbed 40 meters below the surface could be used as a means of cooling. The natural water absorbed four times as much heat as air. Four wells were drilled and pumps installed underground to bring the water to a specially constructed reservoir beneath the data floor. The walls of the data centre were designed to conceal the pipework and house a heat exchanger and completely isolate the water from the equipment. Under normal operating conditions power is only used for the pumps that raise and circulate the water and for the fans. This has reduced energy consumption. In addition, the warm water created from the cooling process is not wasted but piped to local farms to irrigate crops. In cooler months fresh-air cooling supplements the water based cooling. BT s financial savings using this process enables them to pass on the benefit to customers with attractive service pricing. 47

48 4.D Case Study 3 - Standard Chartered Standard Chartered is a leading international bank, listed on the London, Hong Kong and Mumbai stock exchanges. Operating in some of the world s most dynamic markets for over 150 years, it provides a wide-range of banking services for personal and business customers in over 70 countries. Challenge: Safeguarding the interests of clients and building business resilience Clients: The majority of Standard Chartered s climate change risks stem from the projects it finances. The Super- Cycle report, part of Standard Chartered s 2010 global research, states that climate change will particularly affect food, water and energy resources, producing an uncertain environment for investment decisions, of particular relevance to its markets in Africa and Asia. It believes it is crucial that it fully understands clients exposure to environmental, social and reputational risks and the steps necessary for them to prepare for the challenges of climate change. Internal issues: It is likely that climate change will also have an impact on business operations. The bank operates in many markets vulnerable to climate change such as coastal or low-lying regions liable to flooding, including the major financial centres of London, Mumbai, Singapore and Hong Kong. Drought conditions are anticipated across Africa, the Middle East and parts of Asia and operations in North East Asia and the USA are increasingly susceptible to tropical cyclones. These factors lead to an increased risk of business disruption and more stressful working conditions for employees. Globally, changes to mean temperatures will require upgrades to heating and air conditioning systems to maintain a productive working environment with data centres and their cooling systems needing adaptation to cope with extremes of temperatures. Solution: Risk assessment, continuity planning and defining leadership Clients: In 1997, Standard Chartered introduced a formal environmental and social risk policy which included governance of lending activities. It has been a signatory to the Equator Principles since 2003, a voluntary standard for determining, assessing and maintaining environmental and social risk in project financing. The bank developed and implemented a set of position statements setting out its approach and standards on specific issues and industry sectors with high potential for social or environmental impact. In 2009, Standard Chartered developed an Environmental and Social Risk assessment tool to measure client performance against industry peers and enable the bank to build a long-term view of their clients ability and capacity to manage environmental, social and governance risks. The tool is sector specific and reviews a client s operations and their ability to manage risks in line with the bank s position statements. The agricultural sector plays a major role in the regions in which the bank operates. For example, over 60 per cent of the labour force across Africa works in agriculture. The bank s structured agricultural finance division supports commercial and small-scale farmers across the continent, using both traditional forms of collateral as well as a unique Input Financing Model. The model uses a farmer s commodity, such as maize, wheat, soya, or rice, as collateral rather than traditional fixed assets; increasing funding potential and freeing up physical assets for additional financing ventures. The Input Financing model provides hands-on precision farming consultation and expertise as well as incorporating tailor-made multi-peril insurance to minimise the farmer s risk against climate change, fiscal risks and disease. The bank sees the challenges of subsistence farmers to be very different to that of large-scale commercial famers. It has used the model to benefit small-scale farmers in Tanzania with 75 farmers collaborating under the management of a local rice milling company. This approach has helped farmers gain access to the latest developments, including technical skills in climate change adaptation and commercial farming, as well as pooling resources to support commercial pricing and dramatically increasing their individual income potential. 48

49 The bank applies strict governance standards through its position statements requiring farmers seeking investment to comply with local agricultural and labour practices, the Equator principles, and it applies strict avoidance measures to Ramsar accredited wetland areas. Internal issues: The bank manages risks to its operations through its Operational Risk Management framework and Business Continuity Management planning disciplines. Selection of the bank s business continuity sites is based on risk assessments conducted locally which consider impacts of climate change such as analysis of the risk of flooding, either from severe weather or rising sea and river levels. This is particularly relevant in locations like Mumbai and Chennai in India, and Karachi in Pakistan where recently the bank s recovery site remained unaffected by the severe flooding in the central business district. For additional protection, essential equipment such as generators and computer rooms are above ground level where tangible threats exist. The bank has planned for difficulties faced in all its markets. In the UK it has two back-up premises. The Finsgate building, a short distance from its Group Headquarters, can support 70 employees and contains all back up data for the trading floor. A larger site is maintained in Milton Keynes, two hours away, and has the capacity for 200 employees. In Chennai, city centre locations are regularly impacted by heavy rains, either directly from flooding or indirectly through travel difficulties. Consequently, the back-up site is 40km to the south, in Padur, where flooding is not such a high risk. Plans are in place to provide transportation for employees to get to work. Although Padur is not at high risk of flooding from rains, it is near the coast that was badly impacted by the tsunami in When selecting this site, the bank took the tsunami threat into account but a large lagoon between it and the sea offers protection and it was not affected by this disaster. Padur is the Business Continuity site for the Global Shared Service Centre and accommodates 800 staff. Standard Chartered is investing in efficient building management technology and disciplines as well as renewable energy to ensure that it can manage the risks and costs associated with energy use. In addition to managing environmental efficiencies in its commercial and retail portfolios, the bank recognises that significant cost and risk is concentrated in its data centres. In 2010 it began a rolling programme to increase the temperature in data centres from 20 to 23 degrees Centigrade and is planning to implement a wider range of initiatives to manage energy use including server virtualisation supported by a Green Data Centre key performance indicators. The bank takes care to ensure that its existing property portfolio minimises the impact on the environment, ensuring that heritage buildings are sensitively and environmentally refurbished. It has recently renovated its flagship branch, the Jeil building, a 1930 s heritage building in Seoul, South Korea. The Jeil building has improved energy efficiency through renewable technologies including solar panels, high efficiency chillers using green refrigerant, escalator auto sensors, LED signage, motion sensor lighting and a building management system. The renovation project increased the total space available for use by 20 per cent and saves over 30k USD on utility costs annually with a 16 per cent reduction in energy and 20 per cent on water use. Standard Chartered strives to build a sustainable business over the long term. It believes it can positively impact the economy, leading by example to uphold the highest standards. It recognises that as it improves its credentials as a business ready to adapt and manage the risks associated with climate change and resource scarcity, it is also building its global brand. This is of importance in growing customer loyalty and income but is also a key differentiator to attract and retain the best employees and its future management team. Annemarie Durbin, Group Head, Corporate Governance, Property, Environment & Security: Standard Chartered operates in many countries vulnerable to environmental challenges. Rather than simply continuing current business practices, we work to inspire and encourage our employees, clients and customers to minimise their environmental footprint. 49

50 5. Conclusion 5.A Key findings 1. 80% of directly responding FTSE 100 companies identify substantive risks to their business as a result of climate change, with the utilities sector identifying the highest proportion of high significance risks. 2. Many FTSE 100 companies operate internationally, and much of their physical risk perception and adaptation efforts are focused outside the UK. The metals and mining industry in particular perceives itself as exposed to international physical climate risks. 3. The Utilities sector has a more national UK focus with an emphasis on rain/drought, snow/ice, infrastructure, uncertainty in demand forecasting, and water availability. 4. There is marked diversity between attitudes and approaches to risk and adaptation needs in different business sectors; of most significance is the distinction between companies with high tech facilities which focus on direct risk, and those such as consumer staples that are reliant on international supply chains and focus on indirect supply chain risk. 5. The largest percentage of perceived business opportunities related to climate adaptation are identified as current; this suggests that expectations of a green economy in the future are influencing business decisions now. By contrast most of the perceived risks from the physical climate are expected to have impacts over a longer time period. 6. For businesses, risks and opportunities are strongly linked. Many new business risks can also be seen as opportunities because there is the possibility of gaining competitive advantage through doing better than peers or by financially beneficial strategic repositioning. 7. The quantification of the financial implications of risks and costs of adaptation by corporations appears to be quite poor, with many risks unquantified. As a result it is possible that these risks will not be incorporated properly into corporate strategies. 8. Companies are not necessarily using the term adaptation and are not clearly identifying adaptation practices as separate from their overall climate change responses. 9. Less than half of responding FTSE 100 companies incorporate climate adaptation into their business strategies. Among those that do, the main focus is on assets, followed by logistics and finance. 10. Engagement with policy-makers on adaptation is taking place and appears to have an effect on corporate awareness. However, overall there is very little of this type of engagement in comparison with the longstanding strong corporate participation in UK climate mitigation policy. 50

51 5.B Recommendations 1. Government engagement on adaptation clearly does have an effect on corporate perceptions; this seems evident from the high levels of awareness among UK utilities companies that have been subject to the Adaptation Reporting Power. There is therefore an opportunity for government to use interventions to improve climate adaptation by the UK private sector. 2. Communication between companies and policy-makers on the subject of climate adaptation needs to improve, in particular through the development of a common set of terms. Currently many companies engage in adaptation activities but do not use this term in their business strategies. Many more engage in activities that respond to climate change (e.g. by developing new business opportunities) in a way that is not reflected in common definitions of adaptation. Different language is needed in order to achieve meaningful dialogue about the corporate response to climate change between the private sector and government. 3. Almost a third of FTSE 100 companies reported risks that were classified as being of unknown significance, either in relation to their potential impacts or their probability of occurrence. Poor risk assessment in turn leads to risks not being properly incorporated into strategic decision-making. The government could help solve this problem by leading or promoting the development of a standard framework for analysing climate change risk which can be used by private sector entities. 4. Further studies with a larger sample size, would enable larger sector sample sizes and therefore a better identification of trends and best practices; incorporating responses to energy supply and regulation will ensure a broader view of adaptation. 51

52 Appendix 1 Table of companies included in the analysis Company name GICS Industry CDP Investor Response CDP Water Disclosure Response Company name GICS Industry CDP Investor Response CDP Water Disclosure Response Consumer Discretionary GKN Auto Components AQ* Pearson Media AQ Carnival Corporation Compass Intercontinental Hotels Group Whitbread British Sky Broadcasting Hotels, Restaurants & Leisure Hotels, Restaurants & Leisure Hotels, Restaurants & Leisure Hotels, Restaurants & Leisure AQ Reed Elsevier Media AQ AQ WPP Group Media AQ AQ Marks & Spencer Group Multiline Retail AQ Next Multiline Retail AQ* Media AQ Kingfisher Specialty Retail AQ Informa Media AQ* Burberry Limited Consumer Staples Diageo Plc Beverages AQ AQ Associated British Foods Textiles, Apparel & Luxury Goods Food Products SABMiller Beverages AQ AQ Unilever Food Products AQ AQ J Sainsbury Plc Morrison Supermarkets Tesco Energy AMEC Petrofac BG Group BP Financials Food & Staples Retailing Food & Staples Retailing Food & Staples Retailing Energy Equipment & Services Energy Equipment & Services Oil, Gas & Consumable Fuels Oil, Gas & Consumable Fuels AQ Reckitt Benckiser Household Products AQ AQ AQ AQ AQ AQ NR British American Tobacco Imperial Tobacco Group Cairn Energy Royal Dutch Shell AQ AQ Tullow Oil AQ AQ AQ AQ AQ Tobacco AQ AQ Tobacco AQ AQ Oil, Gas & Consumable Fuels Oil, Gas & Consumable Fuels Oil, Gas & Consumable Fuels 3i Group Capital Markets AQ Aviva Insurance AQ Man Group plc Capital Markets AQ Legal & General Group plc Insurance Schroders Capital Markets AQ Old Mutual Insurance AQ Barclays Commercial Banks AQ Prudential PLC Insurance AQ HSBC Holdings plc Commercial Banks AQ Resolution Insurance AQ Investec plc Commercial Banks SA RSA Insurance Group Insurance AQ Lloyds Banking Group Commercial Banks AQ Standard Life Insurance AQ AQ AQ AQ AQ* NR Royal Bank of Scotland Group Commercial Banks AQ British Land Company Real Estate Investment Trusts AQ 52

53 Company name GICS Industry CDP Investor Response CDP Water Disclosure Response Company name GICS Industry CDP Investor Response CDP Water Disclosure Response Standard Chartered Commercial Banks AQ Hammerson Admiral Group Insurance AQ Land Securities Health Care Smith & Nephew SSL International Health Care Equipment & Supplies Health Care Equipment & Supplies AstraZeneca Pharmaceuticals AQ AQ Industrials BAE Systems Aerospace & Defence AQ* NR Smiths Group Real Estate Investment Trusts Real Estate Investment Trusts AQ GlaxoSmithKline Pharmaceuticals AQ AQ SA Shire Pharmaceuticals AQ Industrial Conglomerates Cobham Aerospace & Defence AQ IMI Machinery AQ Rolls-Royce Aerospace & Defence AQ NR Invensys Machinery AQ British Airways Airlines AQ Weir Group Machinery AQ Experian Group G4S Plc Serco Group Information Technology ARM Holdings Materials Commercial Services & Supplies Commercial Services & Supplies Commercial Services & Supplies Semiconductors & Semiconductor Equipment AQ Capita Group Professional Services AQ AQ AQ Bunzl plc Wolseley plc Trading Companies & Distributors Trading Companies & Distributors AQ Sage Group Software AQ Johnson Matthey Chemicals AQ Fresnillo plc Metals & Mining AQ* Rexam Containers & Packaging AQ* Lonmin Metals & Mining AQ Anglo American Metals & Mining AQ AQ Randgold Resources Metals & Mining AQ Antofagasta Metals & Mining AQ AQ Rio Tinto Metals & Mining AQ AQ BHP Billiton Metals & Mining AQ Vedanta Resources Metals & Mining AQ Xstrata Metals & Mining AQ* Materials BT Group Utilities Scottish & Southern Energy International Power Diversified Telecommunication Services AQ Vodafone Group Wireless Telecommunication Services Electric Utilities AQ National Grid Multi-Utilities AQ AQ Independent Power Producers & Energy Traders AQ* United Utilities Multi-Utilities AQ Centrica Multi-Utilities AQ AQ Severn Trent Water Utilities AQ Essar Energy Multi-Utilities SA AQ AQ AQ AQ AQ AQ Note: AQ: Answered Questionnaire (Public) AQ*: Answered Questionnaire (Private) SA: Answered questionnaire through parent company (was not included in the numerical analysis) NR: No Response 53

54 54 Notes

55 55

56 CDP Contacts Kate Levick Head of Government Relations Cassie Chessum Director of Public Affairs Michelle Cox Project Manager CDP Technical Team Emanuele Fanelli Senior Manager Investor CDP Esra Suel Project Officer CDP Technical Team Carbon Disclosure Project 40 Bowling Green Lane London, EC1R 0NE United Kingdom Tel: +44 (0) Fax: +44 (0) CDP Board of Trustees Chair: Alan Brown Schroders James Cameron Climate Change Capital Chris Page Rockefeller Philanthropy Advisors Christoph Schroeder TVM Capital Jeremy Smith Berkeley Energy Takejiro Sueyoshi Tessa Tennant The Ice Organisation Martin Wise Relationship Capital Partners Important Notice The contents of this report may be used by anyone providing acknowledgement is given to Carbon Disclosure Project (CDP). This does not represent a license to repackage or resell any of the data reported to CDP and presented in this report. If you intend to do this, you need to obtain express permission from CDP before doing so. CDP prepared the data and analysis in this report based on responses to the 2011 CDP information request. CDP does not guarantee the accuracy or completeness of this information. CDP makes no representation or warranty, express or implied, and accept no liability concerning the fairness, accuracy, or completeness of the information and opinions contained herein or for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. You should not act upon the information contained in this publication without obtaining specific professional advice. All information and views expressed herein by CDP are based on their judgment at the time of this report and are subject to change without notice due to economic, political, industry and firm specific factors. Guest commentaries where included in this report reflect the views of their respective authors; their inclusion is not an endorsement of them. Carbon Disclosure Project and CDP refers to Carbon Disclosure Project, a United Kingdom company limited by guarantee, registered as a United Kingdom charity number Carbon Disclosure Project. All rights reserved. 56 Design and production Production Studios is a Creative, Design and Production Company based in London. We specialise in the creation of communication, marketing and Advertising materials for clients in the retail, leisure, travel, corporate, not-for-profit and charity sectors. For more information on Production Studios visit