Do you know how much money your business has already lost due to climate change? For most businesses in the Middle East and North Africa, the answer is no.
Smart businesses know that increasing temperatures, extreme weather and rising sea levels are already affecting everything from their energy and water costs to office architecture, supply chain risk, insurance premiums, and staff safety.
Yet too few businesses in the Gulf are thinking so strategically about climate change. Whether this is due to cost aversion, ignorance or complacency, it is a myopia that risks not just profits but potentially their existence. From increasing water bills to the threat of shock events like the flash floods recently hitting Oman and the rising sea levels that threaten expensive coastal infrastructure, the Gulf is already at a climatic extreme. The only question now is when and how much?
Many regional players have offices and people in overseas climate-stressed areas, such as SABIC, a global leader in diversified chemicals, whose presence includes drought-ridden Cape Town, and Bengaluru. Gulf investors have also put capital to work across Africa, whose agricultural sector may bear the brunt of future climate change impacts. Consumer-facing investments could also be undermined by the economy-wide deterioration that would follow an agricultural crisis. For some industries, Africa’s growth is already down from its earlier highs. It is not clear whether Gulf companies are really screening for and measuring the risks and costs of these overseas threats.
Even those not planning to venture abroad will be exposed to global supply chain volatility. Drought-driven spikes in the prices of commodities such as food will impact this import-reliant region. Extreme weather events will hit international travel and transport, a sector critical to the Gulf’s diversification drive, and disrupt global supply chains. Sea level rises could affect the regional coastal investments, the shipping traffic through the crucial Strait of Hormuz, a vital node in global oil and other raw materials trade.
Gulf firms also need to recognise that international financial decision-makers, from institutional investors to private equity funds, are increasingly including climate risk in their investment making decisions. One estimate of global ‘assets at risk’ from climate change quantifies the figure at $4.2 trillion – roughly the value of all the world’s oil and gas companies – so investors will want to know what risks a business is exposed to, and where, before they risk their capital.
Climate insurance is getting pricier too. The insurance bill for 2017 natural catastrophes, which included the hurricane trio of Harvey, Irma and Maria, is estimated at $135bn, according to Munich Re, making last year the costliest hurricane season ever. With insurers losing huge sums, expect rising premiums. Some risks the insurance industry may now not even touch. If governments have to step in as insurer of last resort, they will regulate heavily to ensure companies are doing everything they can to protect themselves. Companies not taking those steps will face significantly rising costs.
Whose responsibility is it?
As a planet-wide development, we know that addressing climate change needs international government agreements. Politicians establish long-term targets and set regulations. But businesses must realise that climate change is not simply an issue for policy makers. It is a direct threat to their success, and even existence, and they need to play a large part as well.
Gulf governments have been enthusiastic participants in green policy. Saudi Arabia’s Vision 2030 agenda aims to increase the share of renewables to 9.5GW by 2023, while Dubai is building a mega-solar park with a planned capacity of 5,000MW. Environmental performance criteria for buildings, especially in the UAE, are tightening. In addition, governments are looking to embrace the Sustainable Development Goals in their national planning.
These are welcome interventions but companies should not just react to regulation. They should also begin to think more strategically. In the longer term, climate change will provide new business opportunities. In the shorter term, climate-proofing your business is an opportunity to undertake a wider review of corporate strategy – your costs, supply chains, market expansion, risks and your daily operations.
At a time of increasing costs in the MENA region, with VAT being introduced and subsidy reductions, businesses can also look at sustainability as a way to cut waste and inefficiency. Companies adopting sustainability principles are known to outperform others; they are run better, they are governed better and they manage their risks better, with fewer surprises to the business and less performance volatility.
Through retrofitting, the headquarters of Dubai Chamber reduced water and energy consumption by 77 per cent and 47 per cent respectively between 1998 and 2008, while commercial firms also prove that business success and sustainability go hand in hand, such as Majid Al Futtaim, the first company in the region to achieve LEED (Leadership in Energy and Environmental Design) certification for its malls, hotels and offices.
To truly future-proof a business, companies should think about how a changing climate affects what and where they can build, buy, and sell. They should forecast the ways these changes will hit their markets, assets and workers at home and abroad. This means planning for possible scenarios and thinking about how ready you are, adapting your business, and preparing mitigation responses for possible threats and then training staff. Supply chains, overseas markets and investments should all be scrutinised for risk.
The goal of this climate proofing is to prepare for the future. The alternative could be no future at all.
Gus Schellekens is MENA climate change and sustainability services leader at EY