Three climate risk challenges (and solutions) for industry

There are three specific areas industry needs help with in managing climate risks, writes UNSW Sydney's David Grant, Ben Newell and Scott Donald

UNSW Sydney is a rich source of expertise and solutions in the fight against climate change. Leveraging this expertise so as to secure optimal outcomes entails adopting creative, often new ways, of working. It involves developing cross-disciplinary teams and building highly productive knowledge partnerships with business and government. This is what the new UNSW Institute for Climate Risk and Response (ICRR) seeks to achieve.

Comprising UNSW researchers from the Faculties of Business, Science, and Law and Justice, the ICRR will focus activity in the University on the urgent need to create strategic advances in industry capacity to assess and respond to climate risk. It will drive an innovative and interdisciplinary research agenda, provide varied tiers of lifelong learning and professional education and be a focus for national, inclusive debate on the risks and opportunities of our changing climate.

Bringing focus to the work of the new Institute has been a revealing and valuable exercise. Establishing the ICRR has provided an important opportunity to construct a high-impact eco-system; one where industry as an end user of, and co-investor in, ICRR knowledge and capability, will play a highly active role in co-creating its research and education agendas.

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An pressing challenge for industry is the translation of climate science into information that can inform industry practice and policy, which can then be communicated clearly to stakeholders. Photo: Adobe Stock

Where does industry need help with climate risk?

From the moment we started planning the new Institute, this was the mindset that we adopted. From the outset, we consulted extensively with business and government. The approach yielded several critical insights into what industry actually needs help with, in order to address climate risk, and what universities (in this case UNSW) can offer in order to achieve this. Importantly, it drove our thinking about what the focus of the Institute needed to be.

Industry believes there are three critical areas where, working in close partnership with them, the ICRR can make a difference. These areas of focus are important because they are indicative of the questions any organisation should ask itself when thinking about how climate risk might impact its planning and operations and how it should respond. Combined, they span the multiple risks related to the transition to a lower-carbon economy and the physical impacts of climate change.

Learn more: UNSW Institute for Climate Risk & Response

Climate science, data and industry impact

The first area of need and concern is the translation of climate science into data and information that can be used to inform industry practice and policy and be communicated to key stakeholders (employees, customers, the public) in a form that can be understood.

There are a few issues at play here. It was, for example, very clear in our discussion with business and government that they feel a degree of uncertainty about how to interpret climate science, how to integrate it into their business models and what climate science they should trust, and from whom. Without climate-related data and information that they felt confident in understanding and using, they worried about the quality and effectiveness of their planning and decision-making and were correspondingly concerned that what they might be communicating to stakeholders could be inaccessible, inaccurate or leave them open to accusations of greenwashing.

Addressing this need requires the kind of interdisciplinary expertise offered by the Institute. For example, one particularly concerning risk of climate change is the potential for what are known as compound events (CEs) to increase. This is where multiple and severe weather events interact with each other in a complex manner, leading to amplified impacts on the physical environment, human systems, and ecosystems.

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Organisations are keen to incorporate improved representations of human behaviour and decision-making into climate models in order to enhance predictive capabilities. Photo: Adobe Stock

An ICRR team of researchers led by Professors Qihe Tang and Andy Pitman and comprising colleagues in Risk and Actuarial Studies and the ARC Centre for Climate Extremes are working with the insurance industry to develop climate science-informed models of climate risk that can be used to quantify the impacts of CEs on insurance pricing, reserving, and capital and risk management. The aim is to use such models to plan insurance-based approaches to mitigating climate change risk in ways that contribute to sustainable economic growth, resilience, and recovery.

In another example, climate economist and ICRR colleague Dr Tim Neal, has been working with Professor Mike Keane on incorporating climate data into economic models designed to predict the potential impacts of future climate change on agricultural productivity. The research shows how unmitigated climate change will greatly reduce yield. In the case of the US alone, this research shows how adaptation can mitigate 36 per cent of the damage, while emissions reductions consistent with the Paris 2015 targets would mitigate 76 per cent.

Read more: Digital sustainability: technology solutions to climate change

Changing human behaviour

A second and more specific area of focus and need is in respect of behavioural science and climate. Industry is keen to see us incorporate improved representations of human behaviour and decision-making into climate models to enhance their predictive capabilities. How human behaviours change in response to the climate risks that we forecast has enormous implications for how government and business should plan for and manage, among other things, social drivers of change, economic activity, and consumer behaviour. It also impacts on how to go about constructing risk management frameworks.

This issue will be a major focus for the Institute. Already, a multi-disciplinary research team including behavioural and climate scientists and led by ICRR Director Professor Ben Newell, is working on a project examining how people understand and interpret climate model projections. Initial findings suggest that people’s prior beliefs about how climate change will evolve – whether along a ‘best case’ or ‘worst case’ trajectory – impact how they think about future global temperatures.

The next step will be to see whether these ‘pessimists’ and ‘optimists’ show a different willingness to take action to combat climate change. Another ICRR multidisciplinary project, also led by Professor Newell, examines what consumers think about climate risks related to real-estate purchases. Pilot work, involving a simulated house-buying game, is being used to assess people’s willingness to pay where properties differ in their exposure to climate-related perils. These results will help inform best practices for communicating risk-related information to consumers.

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Business is actively looking for ways to utilise effective assurance and reporting mechanisms as well as risk management frameworks that help meet climate change standards. Photo: Adobe Stock

Risk management frameworks and standards

The third area of concern pertains to industry’s capacity to put in place effective assurance and other reporting mechanisms and to construct risk management frameworks that enable them to meet voluntary, professional, or regulatory standards regarding climate change. Linked to this, there are also deep concerns about the changing landscape of prudential regulation and how it plays out in relation to climate action as well as a desire to identify and address the legal risks related to climate change where they manifest as, for example, regulatory penalties, class action or climate litigation.

There are multiple concerns at play here, but put simply, how should industry navigate and implement the multiple and complex swathes of regulations and standards (both local and international) that are now present? And once it has applied standards or put reporting mechanisms in place, how does it measure and evaluate their effectiveness with confidence? Industry is presently experiencing major knowledge and capability gaps in these respects. There are enormous opportunities for the new Institute to provide not only applied research that points to best practice and policy, but also to establish educational programs and advice that better upskill and prepare industry.

Work is already underway to achieve this. For example, ICRR colleagues, and members of our Accounting, Auditing & Taxation School here at UNSW such as Dr Maria Balatbat and Associate Professor Noel Harding are already engaging with industry to offer professional education and advice in these areas. The Institute is also in discussion with accounting and other professional bodies about educational offerings that will embed content into professional training and accreditation, or that will provide co-badged/accredited qualifications for managers and employees more broadly.

And similarly, work is underway among colleagues in Law and Justice associated with the institute and led by ICRR Deputy Director, Associate Professor Scott Donald on identifying and understanding the legal risks attached to climate change by linking it to matters such as class action, and climate litigation. They are also exploring opportunities to provide training for industry and other stakeholders such as investors in respect of climate risk.

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Creating climate-literate leaders and managers

The ICRR represents a bold statement by UNSW about its commitment to addressing climate risk and working with industry in order to do so. The Institute brings together an array of expertise, that in combination, represents a powerful resource with which to address the three broad areas of ICRR focus. These areas of focus are not only about applying expertise through research and advice. The research will be used to design and inform the core of its lifelong learning and professional education portfolio. It will be a portfolio designed to help create a new generation of climate-literate leaders and managers in industry and government – a generation of leaders equipped to translate and communicate complex climate information into actionable and effective solutions as we seek to mitigate and adapt to the significant risks (and opportunities) associated with climate change.

David Grant is Senior Deputy Director, UNSW Institute for Climate Risk and Response and Professor of Management, UNSW Business School. Ben Newell is Director, UNSW Institute for Climate Risk & Response and Professor of Psychology, Faculty of Science, UNSW Sydney. Scott Donald is Deputy Director, UNSW Institute for Climate Risk and Response and Associate Professor, Faculty of Law and Justice, UNSW Sydney. For more information, please visit the UNSW Institute for Climate Risk and Response (ICRR) website.


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