It should be no surprise that there is a gap between how society perceives the risks of climate change and how most business decision-makers view these risks. Business decision-making is usually conducted on a much shorter-term time frame than societal decision-making. Moreover, business decision-makers have a narrower view of their role in societal problem-solving than do policy-makers, and business decisions have to adapt to an existing business environment; policy-makers directly modify business environments through laws and regulations.
The net result is that business and policy makers have different perspectives on the “is it worth it?” and “can I do it?” questions underlying climate change decision-making. While some stakeholders may argue “it’s up to business to act!” to solve climate change, the business reality is that a company that chooses to play policy-maker and unilaterally internalize a high carbon price in the near term would likely be put at a competitive disadvantage. The responsible decision-makers would very possibly find themselves out of a job, while simultaneously failing to have any impact on climate change.
Private-sector actions cannot substitute for societal decision-making. But societal perceptions of climate risk are still relevant when it comes to business decision-making. Societal perceptions of climate risk will eventually translate into the business risk environment through policies and measures, brand-impacts, and structural changes to many markets.
The physical risks of climate change look very different through business and societal decision-making lenses. Most risk work by climate scientists and modelers, for example, is not easy to apply to the risk profile of an individual company. The Intergovernmental Panel on Climate Change has projected 10 to 32 inches of global sea level rise by 2100. But this estimate does not reflect the full probability distribution of potential outcomes, which extends to some 16 feet of sea level rise in the worst case.
This is critical information for business risk assessment, which is more about “what could happen with what consequences for me” than about what is most likely to happen at a global level. Factoring in the full probability distribution of potential climate change outcomes, and applying those outcomes to the geographic and other circumstances of an individual company’s operations and its supply chains, will often lead to radically different perceptions of climate risk (both higher and lower) than are being discussed at a national or global level. Robust business risk assessment has to dig deeper than the headlines.