Environmental issues stepped firmly into the limelight during 2016. It was not only the hottest year on record, but also saw the Paris Agreement enter into force, as what may be the world’s best attempt to counter global warming.
The headlines might have moved on now, but it would be a mistake to think that sustainability will take a backseat in 2017. In fact, the World Economic Forum has identified environmental risks as the greatest challenges the world faces, which goes to show that the renewed focus seen in 2016 will only intensify.
We’ve analysed some of the key environmental issues coming up in the year ahead that companies cannot afford to ignore.
Making America grey again
Donald Trump’s alacrity in starting to fulfil campaign promises to gut environmental regulations has thrilled supporters and appalled opponents in equal measure. Proposed cabinet appointments are a casting call of environmental groups’ bêtes noires, ranging from former Exxon chief Rex Tillerson as secretary of state to Scott Pruitt, a lawyer who forged a career suing the Environmental Protection Agency that he now looks set to lead.
Trump’s initial executive orders rolled back rules on dumping mine waste in streams and brought the Keystone and Dakota pipelines back onto the table. This has delighted House Republicans, who have earmarked a slew of environmental and climate change regulations to be removed during the president’s first 100 days.
This tearing up of environmental rules is creating waves of regulatory uncertainty for businesses operating in the US this year, not least because the extent to which Trump can meet his deregulation promises is unclear. Attempts to diminish powerful laws such as the Clean Air Act and Clean Water Act will attract a litany of legal challenges from state governments, NGOs and public health groups, potentially paralysing investment decisions.
How business will react to Trump’s polluters’ charter is also uncertain. Many large companies support the Clean Power Plan and a significant number, including energy giants, publicly back the Paris Agreement on climate change. Perhaps a two-tier system will emerge where some companies seize the opportunity to ‘regress’ to lower standards – regardless of the reputational damage – and others continue to meet their environmental commitments to shareholders and external bodies.
Trump will also face substantial pressure from overseas, given the global trend is for increasing rather than reducing environmental oversight. The international picture could then reflect the domestic profile, whereby stricter environmental regulation in European and Asian markets conflicts with declining oversight in the US.
Fresh climate challenges for business resilience
Fuelled by a strong El Niño effect, 2016 was hotter than any other year on record. This latest example of the variability that is increasingly symptomatic of the global climate was accompanied by crippling drought in southern Africa, bizarrely warm temperatures during the Arctic winter and a prolonged heatwave across India and South-East Asia.
CLIMATE EXTREMES IN 2016
Given the high temperatures and extreme weather events of 2016, companies cannot afford to take their eye off the ball this year. El Niño-Southern Oscillation (ENSO) conditions are transitioning to ‘neutral’, but don’t be fooled by the name: normal conditions in a neutral ENSO can still be violently destructive. The figure below shows how devastating extreme events in recent neutral ENSO years have been.
CLIMATE EXTREMES IN RECENT PREVIOUS ‘NEUTRAL’ ENSO YEARS
The new normal of more frequent weather and climate extremes is not only expected to continue in 2017, but also throw up a new set of unpredictable, yet critical, tests for business resilience. More frequent – and contrasting – extreme weather events present considerable challenges for sectors attempting to plan and adapt.
Businesses must develop strategies to cope with storms, droughts and floods that are not only more severe, but also unpredictably so. Moreover, organisational memory of how to respond to these events is easily lost. Previous severe disasters might have occurred ‘once in a generation’: sufficiently rarely and in such different locations that plans and strategies to tackle their impacts have passed their sell-by date.
Climate change disclosure moves centre-stage
After bubbling under for a while, the pressure on businesses to disclose their financial exposure to climate change, both in terms of the potential impacts of regulatory implications and physical environmental threats, will come to a head in 2017. This year, US companies alone are set to face an estimated 200 shareholder resolutions on climate matters, 15% more than last year.
In 2016, prominent multinational operators in the hydrocarbons sector managed to stave off such resolutions, but this will be an increasingly dicey strategy in 2017 as shareholders demand more transparency on exposure. They are not alone: in December 2016, the G20's Financial Stability Board recommended that all companies in the financial sector disclose their climate risk in public filings. There is no doubt that this was a move designed to cascade across the economy: if finance companies are mandated to publish this information they will need companies in their portfolios to provide it.
The costs of accurately establishing and monitoring exposure in order to satisfy the financial sector’s demands will be substantial and will require swathes of new processes, procedures and staff. And after that, companies have to deal with the potential impact on share value once the disclosures are made public.
Triggers for environmental protests
If there is one thing 2016 brought into sharp relief, it was the power of populism. Surprise victories in both the Brexit vote and the US presidential election were secured by galvanising discrete sections of society around the desire for ‘change’ and then turbo-charging that message through social media.
So-called ‘post-globalisation’ may drive some governments away from environmental oversight in 2017. But this course is likely to trigger vigorous protests – protests that are likely to be amplified by social media channels. Potential flashpoints for such protests are likely to centre on high profile, controversial projects, such as the Dakota Access pipeline and the building of coal power plants near the world's largest mangrove forest in Bangladesh. Both saw scenes of protests and heavy-handed policing last year, which are likely to reoccur in 2017. Companies involved in these projects can expect a reputational backlash and significant disruption, but another one to watch is the reconstituted Keystone XL pipeline carrying Canadian oil from tar sands in Alberta to refineries in Texas, which could galvanise the protest movement in the US.
See Verisk Maplecroft's Political Risk Outlook 2017