Managing climate risk means dealing both with strategic risks to organizations’ core missions and with operational risks that may disrupt fieldwork and specific projects.
Every day the agencies, funds and programmes of the multilateral system (mostly, but not all, within the United Nations) face a multitude of internal and external risks. These risks arise from a wide spectrum of causes and carry an equally diverse set of institutional consequences. International organizations face these risks within an ever-changing operating landscape. One of the major drivers of this evolving ‘risk landscape’ is the speed and scale with which climate change is reshaping our planet
Defining climate risk
There is no universally agreed definition of risk, and different institutions will define risk in different ways. Risk is understood here as the probability of an outcome multiplied by the severity of its consequences. Two factors therefore determine whether a risk is high or low: its likelihood and its potential severity. An outcome that is highly likely but will have minimal impact may not need to be managed at all, while an event that is highly unlikely but would have a significant impact may warrant a substantial investment in prevention or preparation. At its most basic, risk management works to reduce the likelihood of an outcome, the severity of its consequences, or both, depending on the nature of the risk and the management opportunities available.
Based on the Intergovernmental Panel on Climate Change (IPCC)’s definition of disaster risk, climate risk can be defined qualitatively as ‘the likelihood over a specified time period of severe alterations in the normal functioning of a community or a society due to hazardous physical events interacting with vulnerable social conditions, leading to widespread adverse human, material, economic, or environmental effects’.
The nature of climate risk means that it has implications for every international organization. First, climate change is regressive, in that its impacts disproportionately affect the poor, women and those from marginalized groups. Many international organizations have a mandate to support vulnerable populations. Second, climate change is also a systemic risk, in that its direct impacts can have knock-on effects across regions and systems. For example, severe drought in Eastern Europe in 2010 was one of the drivers of the introduction of export bans on agricultural commodities, which was one factor that led to a significant increase in food prices, the popular response to which eventually contributed to the Arab Spring. International organizations whose work focuses on issues such as food security or financial stability need to be prepared for unexpected scenarios resulting from direct and indirect climate impacts. Third, climate is now non-stationary. While weather will always vary, the climate has been remarkably stable over thousands of years as human civilization has developed. Yet the assumption of a stable climate no longer holds. International organizations that are programming investments in infrastructure, for example, now need to make decisions without being able to rely on previous experience.
This paper distinguishes between two separate but related ways in which international organizations can integrate climate risk into their activities and decision-making: at a strategic level, and at an operational level:
- Strategic: integrating climate risk into short- or long-term strategies and decision-making.
- Operational: integrating climate risk into operations, such as fieldwork and projects.
Strategic risk
Strategy sets the overall direction of travel and the objectives that an international organization is trying to achieve. For most international organizations, climate change is not only a risk at the project level but also represents a challenge for meeting the organization’s core mission or mandate. Climate change represents a strategic risk when it could result in the failure of an organization to:
- Meet its objectives;
- Deliver its mandate;
- Operate efficiently; or
- Be prepared for external shocks.
Climate change represents a strategic risk for many of the international organizations examined in this paper, particularly for those engaging with the following key sectors:
Health: Climate change is likely to increase the spread of infectious diseases and the probability of pandemics. In recent decades, the number of emerging infectious diseases that either have the potential to be transmitted to people or have jumped to humans has significantly increased. The socio-economic and political impacts of the COVID-19 pandemic have highlighted all too clearly the risks involved. Meanwhile, long droughts remain one of the most significant environmental causes of premature mortality, impacting sanitation and hygiene, increasing malnutrition, and reducing crop yields.
Food security: At least 40 per cent of crop-growing areas across all continents will likely experience reductions of at least 10 days in crop duration periods by 2050; this is true for a number of major crops, including maize, soya beans, wheat and rice. Projections by the UK’s Meteorological (Met) Office suggest that the likelihood of multiple harvest failures in any two of the world’s major ‘breadbasket’ regions could increase from 1 in 100 years to 1 in 25 years by 2050. A greater than 10 per cent yield shock to grain production is now likely (69 per cent) to occur by 2030. The global spikes in food prices in 2007–08 and 2010–11 arose from relatively modest climate impacts, but these impacts interacted with other factors (such as biofuel policy diverting grain supplies for use in the production of ethanol, low stock transparency) to create a run on grain markets; this led to the implementation of export bans, further amplifying the price effect.
Finance: Sharp and sudden asset write-downs resulting from policy changes aimed at reducing greenhouse gas emissions could result in a massive shift in capital allocation and in shocks to financial markets. BlackRock, the world’s largest asset manager, expects climate change risk to result in a ‘fundamental reallocation of capital’. The Bank for International Settlements has warned that so-called ‘green swan’ events (expected or unexpected climate-driven catastrophes) could cause the next financial crisis.
The Bank for International Settlements has warned that so-called ‘green swan’ events (expected or unexpected climate-driven catastrophes) could cause the next financial crisis.
Migration: Climate impacts are likely to influence migration patterns and have large-scale implications for the many international organizations that work to protect vulnerable populations. The World Bank estimates that climate change is likely to displace around 140 million people by 2050. While many factors lead to the displacement of people, changes in climate have been causally linked to migration at various points in human history. According to recent research, in the next half-century 1 to 3 billion people are projected to live in areas that will fall outside the relatively stable climate conditions of the past 6,000 years.
Energy security: Climate change poses risks to energy systems in at least two ways: firstly, through the direct risks of climate impacts on energy infrastructure; and secondly, through potential disruptions caused by the transition from fossil fuels to renewable energy sources. Global warming will increase demand for electricity for cooling purposes, as well as for electric vehicles and renewable power generation. Reductions in water availability will cause problems for thermal power plant cooling systems and for hydropower generation. Extreme weather also poses a risk to electricity transmission and distribution systems. The International Renewable Energy Agency (IRENA) has published a summary of potential geopolitical impacts from the transition away from fossil fuels, which includes the possibility of political and economic instability in major fossil fuel-exporting countries – especially those with low per capita GDP.
International security: The evidence is growing that direct, indirect and systemic climate change impacts, including scarcity of critical resources and disruption of strategic supply chains, contribute to social and political instability and increase the risk of conflict, particularly in fragile states. Hence, climate change is now commonly referred to as a stress multiplier by many defence ministries, security agencies and intelligence agencies, even if it is unlikely to be the sole cause of any given conflict.
Operational risk
For the purposes of this paper, ‘operational’ factors refer to the delivery of organizational services at the technical, or field, level. If organizational strategy sets the destination of travel, organizational operations constitute the means for getting there. Most international organizations engage in a range of activities: field operations to deliver services, data collection and reporting, convening of stakeholders, and so on.
Many international organizations have staff, infrastructure or other assets in locations that are directly exposed to climate risks and at high risk of social and political instability. These situations present operational risks that have very real implications for staff safety and security.
For international financial institutions such as the World Bank, climate change will have implications for the technical and financial support provided at the project level. For example, the bank funds infrastructure in developing countries that may be at risk from physical climate impacts such as flooding, extreme heat or weather events as global temperatures continue to rise. Not every project will be fundamentally threatened by climate impacts, but financial institutions may need to adjust their operational approaches in some cases.
Which risks matter most?
Strategic and operational risks both matter, and the relative importance of each category of risk varies considerably depending on the international organization involved. In some cases – for example, for the World Meteorological Organization or the IPCC – understanding climate risk is central to an organization’s mission as a provider of data, assessment and analysis. Organizations that have extensive activities in the field are more exposed than organizations working on global policy, and organizations with extensive infrastructure in climate-vulnerable regions are particularly exposed. Organizations focusing on climate-sensitive issues (food, agriculture, water supply) are likely to see greater increases in demand for their services.
However, better understanding of climate risk may also bring opportunities – including for an enhanced appreciation of the importance of resilience relative to growth and efficiency, and for the development of new models of risk management. It may also lead to increased momentum for international cooperation, elusive in recent years due to geopolitical headwinds such as trade disputes or other conflicts.
Minimizing the challenges and maximizing the opportunities associated with climate change will require international organizations to build their capacities for assessing climate risks, to be clear-sighted in how these risks affect their operations, and to work to integrate climate risks into their strategic planning and ERM systems.
