What to submit: A single MS Word or Pages document of 3 pages (about one page for each company, but you can use the 3 pages anyway you want) listing the risks, categorized as transition or physical (chronic or acute) and explaining why this is a potentially important risk for the company to consider and what a solution might be. Make a separate list for each scenario. One to four items per company and scenario is probably the right number depending on the company and scenario. Focus on important risks.
Format: Your submission should have normal 1” margins, 1.5 line spacing and size 12 font. Use the simplest reference style you can for outside sources, if you use any – it is not required. If you work with someone both names should be on your submission. Only one submission is required per pair.
Grading: Scores will be based on whether you identified the key potential risks, how you relate them to the scenarios, your suggested solutions, and formatting and readability.
Overview
This assignment asks you to identify the key climate transition and physical risks for three hypothetical companies. You will do a scenario analysis, assessing risk for each company using two scenarios. The scenarios are a light version of Business-as-Usual and a 2°C scenario with a powerful policy component and lots of innovation. In both scenarios consumers and investors are concerned about climate change and adjust their spending and investing decisions accordingly. In the 2°C scenario companies are much more vulnerable to reputation losses if they are not pro-actively addressing climate change and carbon emissions. Each of the 6 lists (3 companies x 2 scenarios) will have at least one significant risk, but do not list more than four.
For each important risk, explain if it is a transition, chronic physical or acute physical risk, and relate it to the part of the scenario that makes it risky. The scenarios don’t list the physical risks but from our background materials on climate impacts and physical risk you should know these pretty well. Finally for each item listed in a sentence suggest how the company might address the risk. This doesn’t need to be detailed, but I want you to begin thinking about this corrective component of a climate strategy.
The Regular Person’s Guide to Scenario Analysis for Climate Risk
If you know how your company operates – where is has plants/stores, what its key inputs are, who it sells to, and recent talk by customers and investors – you can do a good scenario analysis. Sometimes knowing the KPIs (Key Performance Indicators) for your company/industry will point you potential vulnerabilities. I discuss how to move through an analysis with two scenarios, like in the assignment.
For a given scenario you can answer the following questions and begin to figure out where your company may be exposed to climate risk. For a Business-as-Usual scenario a carbon tax may not have a big effect on your company, but you need to look down stream at customers and how they will make decisions. Also in a a Business-as-Usual scenario innovation will not be incentivized very much, so technology risk may be low. Reputation risk can be significant under a Business-as-Usual scenario. Just because politicians haven’t adopted climate-friendly policies doesn’t mean that no one cares.
Under a 2°C or 1.5°C scenario there will be carbon taxes and probably carbon border adjustments. Can the company be profitable paying these taxes/tariffs? This pathway will see a lot of innovation. How will that affect your equipment and other assets? Is there a risk of stranded assets? Might other technologies threaten sales? If your company lags in terms of addressing climate change, will customers, investors and employees leave?
Once you have answers to some of these questions consider how serious their effect in sales and costs will be. If under both scenarios the company is exposed to a certain type of risk, this needs to be fixed ASAP. If a risk is very large – it could make the company fail – then it needs to be addressed. Other risks needs to be prioritized and plans made as the actual world reveals itself; that is, we don’t know if the future will be a Business-as-Usual or on a 2°C pathway. When signals begin to appear about how the future will unfold, then the company will need to adapt and change in response.
Transition Risk Questions
Transition risk includes risks from changes in policy, technology, markets and reputation. A transition risk analysis needs to ask the following questions.
- Policies, rules and laws: The most important policy change for most companies will be if a carbon tax or carbon border adjustment is implemented. The key questions to ask are:
- What is the carbon intensity of your company compared to competitors?
- Are any of your customers deeply concerned about their supply chain carbon footprint?
- Technology: The big issues are will your current technology be stranded (have limited/no value) and how much will new technology cost?
- Is there low carbon technology available for your production? If so, does your company own it? How much will it cost to upgrade?
- What is the risk that non-state-of-the-art technology could be stranded?
- Do low carbon shopping apps flag your products as high emission?
- Markets
- Are your products being identified by consumers as high carbon emitting?
- Do your products have other high impact sustainability problems, e.g., waste, labor issues, etc.?
- Are competitors introducing low-carbon products?
- Reputation
- Is your sector being singled out as bad for the planet?
- Can your company hire the employees it wants?
- Are investors asking for more disclosure or specific changes in your production methods or business model?
Physical Risk Questions
Resource: Emilie Mazzacurati, Scenario Analysis for Physical Climate Risk: Equity Markets( LINK (Links to an external site.) )
- Does the company have facility-level exposure to acute climate physical risk events such as hurricanes & typhoons, sea level rise, floods, wildfires, extreme heat and water stress?
- Does the company have facility-level exposure to chronic climate physical risks such as sea level rise, droughts, and water scarcity?
- If the facilities are unharmed during an extreme event, will it be able to operate? Consider transport, power availability, worker safety.
- How vulnerable is the company’s supply chain to either acute or chronic climate physical risk? Consider transportation routes, cost and availability of natural resources and inability of workers to be productive.
The Companies
Company 1: Packaging Sector
Company 1 makes an assortment of plastic packaging. The products include plastic six-pack rings, single-use grocery bags, PET molded salad containers with plastic film adhesive tops, Pet soda pop bottles and similar clear, then plastic containers. The Company has two plants. One is near Houston, Texas, close to ethane sources that is the main feedstock of most of its products. Cheap natural gas is also the primary energy source for the Houston plant. A second plant, where molded plastic containers are made, and its headquarters is in Jersey City, New Jersey, which is in Hudson County.
Company 1 has not invested in sustainability efforts other than in energy efficiency in its plants and offices and buying some green electricity (about 15% of its annual demand). Its products continue to be fossil fuel heavy. It carbon emissions are about 6 kg per kg of product. Emissions per unit production is a metric of carbon intensity. Best practices in the packaging sector have reduced this carbon intensity to below 3 kg per kg of product. Competitors are developing alternatives that are highly recyclable, often made with post-consumer paper and much less plastic film.
The Company has continued to invest in equipment designed specifically to produce the plastic film and PET products it has produced for decades. In 2018 it invested almost $40 million in new equipment. The Company does limited R&D getting new ideas by watching competitors and attending trade shows.
Company 1 sells directly to food processors, carbonated and fruit juice drink makers and large farm co-operatives that package produce for grocery chains. The business is competitive with most customers comparing prices every year to two.
Company 2: Clothing Manufacturing and Retailing
Company 2 makes low-cost casual clothing aimed at the tween/teen/twenties market. It uses a typical fast fashion business model of quickly identifying trends, knocking off designs and getting items into its 75 retail location quickly. Its clothes are often based on H&M and Zara designs with some changes to make them a bit more edgy and urban.
Most items are not durable, and are not meant to be. The goal is having a customer turn over their wardrobe every 4 to 5 months. Customers who return 3 items to a retail store receive 10% that day’s purchase. Recycled item are sorted with some given to charity, but because of the clothing’s low quality some large charities no longer accept the items. The rest is landfilled or incinerated. The Company tends to try and copy sustainability efforts by H&M, though at a much lower level.
Manufacturing is done in Bangladesh and Vietnam through contractors there. The Company does not do site visits to assure worker safety, fair pay or no child labor is being used. They leave that to the contractors, who attest to or certify that the workplace standard meets or exceeds national guidelines or laws.
Retail locations are rental units in shopping malls. The Company has little control over the energy efficiency of these units. Landlords vary in their concern with energy use, the source of store fixtures and floor and wall coverings. The Company has a standard layout and décor that it moves into these spaces.
Company 3: Restaurant
Company 3 is a family restaurant chain based on a cowboy, American West theme. Its menu includes a variety of BBQ-ed and grilled meats. Portions are large and customers have access to a salad and potato bar for unlimited side dishes. Prices are moderate but alcohol sales produces a good profit margin overall.
The Company has 24 company-owned restaurants and 61 franchise outlets. All buildings follow a standard design and have highly energy efficient appliances and lighting systems. Most food waste is collected for compost. No single use tableware is used. Napkins and tablecloths are easily recyclable paper. Take-home containers are molded paper pulp so compost or recycle.
Food sourcing is regional or national determined by finding a balance between quality and price. The Company has special contracts with several meat processors for specific grades of beef, pork and chicken. Salad components are also sourced regionally or nationally as local farmers are unlikely to provide the year-round quantity required.
The Company pays well, a minimum of $15 per hour for servers who also share tips. The Company offers good benefits and has a career track for employees who would like to move into management.
During the COVID pandemic the Company tried delivery, but after examining the results has chosen to be dine-in/carry-out only. Management tends to be open to new ideas, though they must be within the western theme that is the Company’s brand.
The Scenarios
Scenario 1: Business-as-Usual Scenario 2: Pro-Active to 2°C Policy No carbon tax for at least 10 years. Decreasing incentives for renewable energy and electric vehicles Carbon tax of $60 mtCO2e implemented immediately with a 3% annual increase. Incentives for zero-carbon vehicles and renewable energy generation. Technology Limited targeted governmental research funding for carbon mitigation and/or climate adaptation. Industry continues to innovate especially in areas of energy efficiency, waste reduction. No significant breakthroughs in decarbonizing hard-to-clean industries such as cement and oil and gas. Plastic recycling improves, tripling recycling rates of the most common types of plastic: LDPE, HDPE and PPE. Significant Federal funding for research in climate related areas, especially technology. The carbon tax draws out lots of venture capital money to support start-ups. Several breakthroughs that reduce emissions even in the hard-to-clean sectors such as aviation, steel, aluminum and cement Plastic recycling improves more than tripling recycling rates of the most common types of plastic: LDPE, HDPE and PPE.
Markets Consumer and investor concern about climate change grows in response to government inaction. Consumer preferences shift to low/no carbon, organic, zero waste. Leading companies respond with some new offerings. Investors develop effective metrics to evaluate company ESG performance reducing greenwashing opportunities. Consumer and investor concern about climate change grows in response to government inaction. Consumer preferences shift to low/no carbon, organic, zero waste. Most companies respond with a wide range of new offerings. Investors develop effective metrics to evaluate company ESG performance reducing greenwashing opportunities. Reputation Employees and consumers shift to more pro-active companies. Consumers and watchdog groups use social media to identify leaders and laggers in the fight against climate change. Employees and consumers shift to more pro-active companies. Consumers and watchdog groups use social media to identify leaders and laggers in the fight against climate change. Some laggers are blacklisted.
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