Climate Risk and Business - Practical Methods for Assessing Risk - International Finance Corporation
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Climate Risk and Business Practical Methods for Assessing Risk
Acknowledgments © 2010, International Finance Corporation First printing, September 2010 Authored by Vladimir Stenek, International Finance Corporation Richenda Connell, Acclimatise John Firth, Acclimatise Michelle Colley, Acclimatise IFC and the authors wish to thank the management and staff of Himal Power Limited, Ghana Oil Palm Development Company and Packages Ltd. for their support and cooperation in the elaboration of the studies. The authors also wish to thank the numerous local experts and institutions listed in Annex 3 for their valuable contributions to the studies. This work benefited from support provided by the Trust Fund for Environmentally & Socially Sustainable Development (TFESSD), made available by the governments of Finland and Norway. Reviewers We thank the following for their critical review and comments: Peter-Martin Thimme (DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbH) , Alan Miller, Jamie Fergusson, Susan Holleran, and Katia Theriault (IFC). Editors Rachel Kamins, Anna Hidalgo, Vladimir Stenek, Richenda Connell Designer Studio Grafik Photo credits Vladimir Stenek, International Finance Corporation Chris Train, UK Environment Agency Packages Ltd.
Climate Risk and Business Practical Methods for Assessing Risk
Foreword Climate change creates both risks and opportunities for the private sector, particularly in emerging markets. Climate impacts may affect companies’ financial, economic, environmental and social performance, especially when they rely on long-lived fixed assets or have complex supply chains. Yet to date, the evidence for the significance of these issues has been poorly defined. Most climate change assessments express impacts due to changes in a limited number of parameters, usually average temperature and precipitation, over large geographic areas and on relatively long time- horizons. However, private-sector needs include shorter time horizons, focused on smaller geographic areas and information about impacts that is specific to the business. Very few companies and private sector stakeholders, particularly those that are smaller in size, many of whom are in climate sensitive sectors, have the capacity and resources to produce such information. Recognizing the gaps in knowledge of how climate change will affect the private sector and of the potential significance of the risks to investors, IFC undertook three pilot studies from 2008 to 2009, based on investments in developing countries. These studies aimed to understand gaps and barriers to private-sector climate risk analysis, to test and develop methodologies for evaluating these risks and, in this context, to identify possible adaptation responses and needs. Despite the challenges and uncertainties inherent in undertaking such assessments, the studies have been able to generate new information related to climate risks to a variety of businesses across different locations. They have also demonstrated some of the practical approaches that can be applied by businesses to understand these risks better, to react as necessary, and to reduce uncertainty about the future. Ultimately, the ability of businesses like those studied here to adapt to climate change will depend not only on their own actions but also on the actions that may be needed from the public sector, non-government organizations, the scientific community and other stakeholders. These pilot studies are an important first step in IFC’s broader initiative to develop an understanding of the implications of climate change for business. IFC will continue to support this type of analytical work, which is critically important to helping our clients, and the private sector more broadly, to adapt to the challenges and opportunities brought about by climate change. Rachel Kyte Vice President, Business Advisory Services International Finance Corporation
Table of Contents
Foreword
Introduction 1
The pilot studies 1
Approach to the assessments 3
Climate risks to investment performance 4
Adaptation actions 7
Lessons learned, uncertainties, gaps and barriers 9
Value of visit to client site and stakeholder engagement 9
Climate data 9
Assessments of risk to investment performance 12
Analysis and recommendations on adaptation actions 13
General results and conclusions 15
Most significant risks and uncertainties 15
Temperature-related impacts 18
From uncertainty to risk 19
Annex 1: A risk-based approach 21
Annex 2: Summary results of pilot studies 22
Annex 3: Acknowledgments 38
References 39Introduction
The main objective of the first set
of pilot climate risk assessment The pilot studies
studies undertaken by IFC was to test
and begin to develop methods for Himal Power Ltd. Khimti 1
evaluating climate risks to the private hydropower scheme, Nepal
sector and to identify appropriate Khimti 1 is a 60 MW run-of-river
adaptation responses. This included hydropower facility, generating 350 GWh
analyzing barriers and gaps preventing of electricity per year, located in Dolakha
evaluation of risks and adaptation District, about 100 km east of Kathmandu.
options, and understanding the roles The facility utilizes a drop from 1,270 to
of different stakeholders (private and 586 m above sea level from the Khimti River, Khimti 1 power house and complex
public) in addressing those constraints. a tributary of the Tama Koshi River. Khimti
The studies also aimed to provide 1 was built and is owned and operated by Himal Power Ltd. (HPL) and, as a public-
information that reduces uncertainty private partnership project, will be transferred to the Nepalese government in the
about present-day and future climate- future. The timescale for this study was from the present day to the 2050s.
related risks to the pilot study clients.
In this context, the pilot studies should Packages Ltd. Bulleh Shah
be viewed as an initial step towards Paper Mills, Pakistan
elaboration of general tools for Packages Ltd. is Pakistan’s premier pulp and
climate risk assessment and evaluation paper packaging company and has been
of adaptation options, for use in the an IFC client since 1964. The company
private sector. produces paper and paperboard, writing
and printing paper, tissue products, and
The first three studies analyzed flexible packaging products. It uses wheat Winding reels at BSPM
Khimti 1 hydropower facility in Nepal, straw, recycled and waste paper, and
Packages Bulleh Shah paper mills imported pulp in its production lines. The newly established Bulleh Shah Paper Mills
in Pakistan, and Ghana Oil Palm (BSPM), near Kasur, have allowed the company to relocate existing pulp and paper
Development Company (GOPDC). production facilities from its headquarters in Lahore to larger premises, enabling it
This report aims to provide an to increase its production capacity from 100,000 to 300,000 tons per year. It also
overview of the approaches used generates power on-site and sells excess power to the grid. The timescale for this
in the studies and the challenges assessment was from the present day to the 2040s.
encountered. It also provides tables
which summarize the main results Ghana Oil Palm Development Company
of the studies. Full reports providing Ltd. (GOPDC), Ghana
more detailed data and analyses GOPDC is an integrated agro-industrial
are available at www.ifc.org/ company with two oil palm plantations, at
climatechange. Kwae and Okumaning in Ghana’s eastern
region. GOPDC also operates a mill at
The lessons learned from the pilot Kwae, where oil palm fresh fruit bunches
studies included: are processed into crude palm oil (CPO) GOPDC plantation worker
and palm kernel oil (PKO). Also at Kwae,
• The most significant climate risks a refinery and fractionation plant processes up to 150 metric tons/day of CPO into
on the timescales of relevance to olein and stearin products. The timescale for this assessment was from the present
clients are where existing climatic day to the 2030s.
vulnerabilities may be exacerbated
Climate Risk and Business | Practical Methods for Assessing Risk 1and critical performance or TABLE 1: RISK AREAS ANALYZED FOR THE THREE PILOT STUDIES
compliance thresholds may be
HPL Khimti 1 Packages Ltd. Bulleh
crossed, as well as where systems
hydropower scheme Shah Paper Mill GOPDC Ltd.
are highly sensitive to changes in
climatic factors. Power generation from Wheat yields Oil palm yield
• With the rapid evolution of hydropower scheme during
Power production from Oil palm pests and
climate science, information on dry and wet seasons
steam turbine and boiler diseases
changes in the frequency and Extreme flood event on
Groundwater resources Ecosystem services
intensity of extreme climatic Khimti Khola and Tami
events (e.g., heavy rainfall or Koshi rivers Wastewater treatment Refinery/fractionation
major flooding), and potential plant plant
Landslide blocking Khimti
impacts and consequences for a Pulp and paper industry Power production
Khola River and access
business’ operations will become generally
road to site Groundwater resources
available.
• Using downscaled projections Glacial lake outburst flood Community and social
Wastewater treatment
of global climate models for issues
Increase in irrigation Malaria affecting GOPDC
regions where these models are demand for agriculture workforce
in good agreement can help
provide better understanding of Local community Community and social
changes at a local level. livelihoods issues
• Publicly funded research can
help to develop understanding
of the relationships between
climatic factors and their Methodology in time (2008/9), and that some
impacts on different systems of the pilot study findings reflect
and can build generic system The studies used a risk-based approach, the underlying uncertainties in
models. Provided that such presented in Annex 1. The principal this evidence base. However, the
models are made accessible, areas of risk identified during the ongoing and rapid advancement of
private-sector stakeholders can process are listed in the table above. climate science – new research and
adapt them to better represent new generations of climate models
the specific conditions for their It is worth noting that the – is expected, in time, to provide
investments. information about climate change increasing levels of confidence about
and its impacts applied in the studies climate change and its impacts,
was the best publicly available even in regions currently known for
information at a specific point difficulties in climate modeling.
2 Climate Risk and Business | Practical Methods for Assessing RiskApproach to the assessments
CLIMATE DATA Figure 1: Trend in Observed Annual Average of Monthly Mean Temperature (°C)
at Akim Oda Meteorological Station, Near GOPDC Plantations, 1970–2007
Observed conditions
Changes in annual average of monthly mean temperature
The studies required data on Annual mean temperature (oC) 28.0
observed and future climatic 27.5
conditions. Observed data were
obtained from a variety of sources, 27.0
including the client companies, 26.5
national meteorological agencies, 26.0
and the Intergovernmental Panel on
Climate Change Data Distribution 25.5
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Centre (IPCC DDC).1 These data
were analyzed to provide a view of
Annual Average Mean Temperature
“baseline” climatic conditions against
which future climate change impacts
could be assessed and to identify
any trends in the observed records. Scenarios of future The country profiles provide analyses
By way of example, Figure 1 shows climate change of changes in the following climatic
the observed trend in annual average parameters, year by year, out to
temperatures recorded at Akim Scenarios of changes in future 2100, on an annual and seasonal
Oda meteorological station, near climatic conditions were sourced basis:
GOPDC’s plantations. The data show mainly from the United Nations
an upward trend, with an increase Development Program (UNDP) • Mean temperature
of 1.5°C having occurred over the Climate Change Country Profiles • Mean precipitation
period 1970–2007. This represents (McSweeney, New, and Lizcano • Indices of extreme daily
an increase of approximately 0.04°C 2008). These profiles were temperatures (from the
per year and is an indication that the developed to address the climate 2060s onward), including the
effects of climate change may already change information gap in frequency of “hot” and “cold”
be underway in the region. developing countries. They provide days and nights
multi-model projections of changes • Indices of extreme daily
in future climatic conditions from precipitation (from the 2060s
15 of the most up-to-date general onward), including the
circulation models (GCMs), as used proportion of total rainfall
in the IPCC’s Fourth Assessment falling in “heavy” events,
Report, for a range of different maximum 1-day rainfall
emissions scenarios (namely A2, amounts, and maximum 5-day
A1B, and B1).2 rainfall amounts.
1. Online at http://www.ipcc-data.org/ddc_visualisation.html.
2. For further information on the IPCC emissions scenarios, see the IPCC Fourth Assessment Report, available online at http://www.ipcc.ch.
Climate Risk and Business | Practical Methods for Assessing Risk 3As an example, Figure 2 shows Figure 2: Projected Percentage Changes in Monthly Average Precipitation in
projected changes in monthly Nepal for the Dry Season (Dec/Jan/Feb) and the Wet Season (Jun/Jul/Aug) by
average precipitation in Nepal by the 2030s, relative to the 1970–99 baseline
the 2030s according to the country’s
UNDP climate change profile, using
Dec/Jan/Feb
the A2 emissions scenario.3
On the timescales of relevance to
the pilot study clients, no data were
available from the UNDP country
profiles on changes in the indices
of extreme daily temperatures and
precipitation. The limitations of
applying GCMs to assessments at
the scale of individual project sites
are discussed below.
CLIMATE RISKS TO
INVESTMENT PERFORMANCE
The data on future climate change
Jun/Jul/Aug
were used to assess risks to the
performance of the pilot study
projects. Undertaking these risk
assessments required understanding
of the relationships between
climatic factors and the aspect of
performance (i.e., the system) being
considered.
Source: McSweeney et al. 2008
3. The grids in the figure divide the area of Nepal by longitude (x-axis) and latitude (y-axis). Khimti 1 is located in the grid box highlighted in blue
in the top figure. In each grid box, the central value (large number) shows the median of the 15 climate models, and the values in the upper and
lower corners are the maximum and minimum model values. According to this analysis, the median change in monthly average precipitation
projected for Khimti 1 is –7 percent (low to high range of –37 to +11 percent) for the dry season and +2 percent (low to high range of –23 to +43
percent) for the wet season.
4 Climate Risk and Business | Practical Methods for Assessing RiskWhere possible, these relationships Figure 3: Correlation between Malaria Cases per Month (%) and Number of
were established based on data Rainy Days (Two Months Lagged), 2004–7, from St. Dominic’s Hospital
recorded at, or close to, the pilot
study site. For example, Figure Scatterplot of percentage of malaria cases per month vs. number of rainy days
3 uses data collected from St. per month (two-months lagged), 2004-2007
Dominic’s Hospital, the nearest 25
Number of rainy days per month
hospital to GOPDC, to show the r=0.79, pFinally, for risk areas where no Figure 5: Projected Net Reduction in Income at GOPDC Due to Impacts of Rising
literature on climate change Temperatures on Refinery Vacuum Strength and Olein and Stearin Production
impacts could be found, such as the
industrial facilities at Packages and Projected average annual temperatures at Kwae from 2010 to 2030, and associated net
GOPDC, the study teams were able annual financial impact ($) related to reduction in vacuum strength in refinery,
to work effectively with the facility affecting olein and stearin production, with excess CPO sold instead (12% discount rate)
managers and engineers to develop 31.7 8000
Net annual financial impact
a good understanding of the risks to 31.6 7000
the companies’ performance. 31.5 6000
31.4 5000
Analysis of financial impacts 31.3
T(oC)
4000
($)
31.2
3000
Where possible, technical/ 31.1
2000
operational, environmental, 31.0
30.9 1000
and social risks to client project
30.8 0
performance were translated
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
into financial risks. Achieving this
depended on being able to apply Year
a financial value to risks quantified Annual reduction in financial performance ($) Temperature (deg C)
in physical terms. Broadly speaking,
the financial issues analyzed can be Note: 12% discount rate applied. Rising temperatures will negatively impact the production of
olein and stearin by raising cooling water temperatures, thus decreasing vacuum strength and
categorized as: reducing the efficiency of GOPDC’s refinery operations. These figures assume that unprocessed
crude palm oil will be sold directly to market, offsetting the loss of revenue due to the reduction
• changes in income due to in olein and stearin production.
changes in output and efficiency
(see, e.g., Figure 5) or
• changes in operating costs (see, TABLE 2: PROJECTED REVENUE CHANGES FOR PACKAGES, PAKISTAN,
e.g., Table 2, purple text). DUE TO CHANGES IN INCOME AND FUEL COSTS RELATED TO POWER
PRODUCTION
Some risks, such as temporary Impact Temperature increase by 2020s
shutdowns of facilities due to 1.1°C 1.26°C 1.88°C
extreme climatic events (e.g.,
Power output of steam turbine (current 17.78 MW 17.77 MW 17.73 MW
major floods), clearly also have
level is 17.85 MW)
the potential to affect financial
Reduction in annual income due to –$57,000 –$65,000 –$98,000
performance. However, owing to
reduced power output, based on
a lack of knowledge about the
assumed $0.1/kWhr and 340 operating
present-day and future probabilities
days/year
of such events, it was not possible
to quantify them in financial terms. Offset by reduction in annual operating $25,300 $28,000 $45,000
Filling this gap is a research objective cost of natural gas (boiler fuel)
that is recognized by governments Net change in annual revenue –$31,700 –$37,000 –$53,000
and scientists, and there are efforts Total undiscounted change in revenue –$253,600 –$296,000 –$424,000
underway to address it through from present day to 2017
various fora, such as the World
Total discounted change in revenue –$157,474 –$183,803 –$263,285
Meteorological Organization and
from present day to 2017 (12%
the IPCC. Still, due to the rarity
discount rate)
of extreme climatic events and
the complexities in understanding Note: 2017 is the final year in Package’s current financial model. Rising temperatures will
what drives changes in their produce savings for Packages in the cost of its natural gas usage by increasing boiler efficiency.
incidence, this will continue to be
an area of uncertainty in climate risk
assessments. Strategies for robust
decision making on climate resilience
need to be developed despite
the limitations of this imperfect
knowledge.
6 Climate Risk and Business | Practical Methods for Assessing RiskADAPTATION ACTIONS Instead, based on the levels of
confidence in the various risk
The pilot studies made less progress analyses, different risk management
in analyzing the costs and benefits options were recommended for the
of adaptation actions to manage clients to consider. In essence, where
the risks identified. This is because there was high confidence in the
the appropriate adaptation actions risk analyses, it was recommended
and associated costs for a given that clients investigate the costs
client are highly specific to the and benefits of adaptation
assets or processes being adapted, actions. Where there was lower
and decisions on when it would be confidence associated with the risk
appropriate to undertake action assessments, a more exploratory
may depend on current and future approach was suggested, including
regulatory positions, age, condition, research, monitoring, field trials and
and operating regimes of existing surveillance.
assets, as well as the client’s
investment plans. For some risk areas (such as malaria
incidence affecting workers at
GOPDC), the analysis showed that
the effects of present-day climate
The appropriate variability on income were already
adaptation actions important. In these cases, it was
recommended that the client should
and associated investigate actions that could
costs for a given be taken now to better manage
climate-related impacts.
client are highly
specific to the Overall, the pilot studies have
provided information on climate risks
assets or processes and recommendations on adaptation
actions which the clients can
being adapted. incorporate into their mid- and long-
term financial and operational plans.
Climate Risk and Business | Practical Methods for Assessing Risk 7Lessons learned, uncertainties,
gaps and barriers
In developing the pilot studies,
many issues were encountered that
The Khimti 1 and GOPDC visits
lasted for one and two weeks,
The clients
are common to all climate risk and respectively. Each involved a also found the
adaptation assessments and which will workshop and in-depth meetings
be familiar to those who have been with client staff responsible for interaction with
involved in such studies. However, managing financial, technical/ the study teams
there are also some aspects that operational, environmental, and
are unique to undertaking these social performance, as well as site to be a fruitful
assessments with the private sector. visits. These were vital in providing
insights into existing climatic
experience, which
VALUE OF VISIT TO CLIENT vulnerabilities, sensitivities, and helped to build
SITE AND STAKEHOLDER
ENGAGEMENT
critical climate-related thresholds.
The clients were also able to provide
their appreciation
data and reports which were used to of climate risk and
The three pilot studies were develop the climate risk assessments.
undertaken in sequence; Khimti 1 its relevance to
was the first, followed by Packages
and then GOPDC. Each study
Meetings with external parties as
part of the visits, including national
their objectives.
gained from the experiences of and local government officials,
earlier studies, and the GOPDC research institutes, universities,
study was able to achieve the community groups and public- CLIMATE DATA
most. Owing to security concerns service providers, were also very
in Pakistan, the visit to Packages informative. These provided data The climate data constraints
could not be undertaken, and and reports on the pilot study encountered in the pilot studies
interaction between the client sectors and their vulnerability to are common to all climate risk
and the consultants was restricted current climate conditions, as well as assessments. They relate to
to telephone conferences and information on in-country research uncertainties in data quality for
e-mail exchanges. It became on climate change and its impacts. both observed and future climate
very apparent that this made a conditions.
considerable difference to the The clients also noted that they
depth of analysis that could be benefited from the experience of
achieved for Packages compared being involved in the pilot studies and Observed conditions
to Khimti 1 and GOPDC. In many that it led to some changes in their
cases, the Packages pilot study activities. For instance, for GOPDC Ideally, robust climate risk
was therefore based on generic the work was a stimulus for them to assessments should be undertaken
published information in the begin to monitor climatically sensitive by drawing on long-term (at least
scientific and engineering literature issues, to correlate some aspects 30-year), high-quality records of all
rather than on client-specific of performance against climatic relevant climate statistics, measured
information. factors, and to engage with other at the project site. In practice, such
stakeholders who held information data sets are seldom available, and
about risks. it is often necessary to utilize data
collected at meteorological stations
Climate Risk and Business | Practical Methods for Assessing Risk 9operated by national meteorological Figure 6: Average Monthly Maximum and Minimum Air Temperatures (°C) for
agencies, which may not be Jiri and Janakpur Meteorological Stations, 1971–2000
representative of the project site.
40
This is exemplified in the Khimti 35
1 pilot study. Observed monthly
Temperature (deg C)
30
temperature data for the two closest
25
meteorological stations to the project
site, Jiri and Janakpur, are shown in 20
Figure 6. Jiri and Janakpur are both 15
approximately 20 km (north and 10
south, respectively) from Khimti 1 5
power station, at altitudes of about 0
2,000 m and 78 m. The Khimti 1
-5
power station is at an altitude of Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
approximately 700 m. As can be seen
Month
in Figure 6, the differences in altitude Average monthly max Average monthly min
result in considerable differences temps Jiri (1971-2000) temps Jiri (1971-2000)
in the climate data recorded at Average monthly max Average monthly min
each meteorological station. The temps Janakpur (1990-2000) temps Janakpur (1990-2000)
catchment area for the Khimti Khola
River (on which the hydropower Furthermore, in order to undertake a “The understanding of
scheme relies) is in very mountainous climate risk assessment it is important anthropogenic warming and
terrain, over which there is great to understand the natural variability in cooling influences on climate
variation in climate conditions. To climate conditions onto which climate has improved since the TAR
undertake a climate risk assessment change effects will be superimposed. [Third Assessment Report],
of future changes in river flow, For instance, where climate change leading to very high confidence
it is first necessary to develop a leads to decreases in precipitation, that the global average net
model that relates observed climatic these decreases would be exacerbated effect of human activities since
conditions and observed river flows. in a dry year in the future, leading to 1750 has been one of warming
Building such a model in an area potentially severe impacts, whereas (IPCC 2007b, “Technical
where the baseline climate is highly they might be counteracted in a Summary,” sec. 2.5).”
spatially variable over a small area is wetter year. In general, precipitation is
challenging. highly variable from year to year (see, “Warming of the climate system
e.g., the data from Lahore, Pakistan, is unequivocal, as is now evident
Ideally, robust in Figure 7), whereas variability in
temperature tends to be lower. In
from observations of increases
in global average air and ocean
climate risk practice, however, given constraints temperatures, widespread
assessments should on the resources available for the pilot
studies, the climate risk assessments
melting of snow and ice, and
rising global average sea level
be undertaken were generally performed by (IPCC 2007a, sec. 1.1).”
superimposing future climate change
by drawing on scenarios onto the average baseline For the next two decades, a
long-term (at least climate conditions. warming of about 0.2oC per
decade is projected for a range
30-year), high- Scenarios of future climate of SRES4 emission scenarios.
quality records of change
“Anthropogenic warming and
all relevant climate The IPCC Fourth Assessment Report sea level rise would continue
makes it clear that man-made for centuries due to the time
statistics, measured climate change has been underway scales associated with climate
at the project for decades and will continue for
decades to come:
processes and feedbacks, even if
greenhouse gas concentrations
site. In practice, were to be stabilised (IPCC
such data sets are 2007a, sec. 3).”
seldom available. 4. Special Report on Emissions Scenarios; IPCC 2007a, “Summary for Policymakers”
10 Climate Risk and Business | Practical Methods for Assessing RiskFigure 7: Observed Monthly Precipitation at Lahore (top) and Time-Series of How global climate change will
Winter (Dec/Jan/Feb/Mar) Precipitation at Lahore (bottom), 1861–2008 translate at the local level. To some
extent, this can be analyzed by
300
This chart shows average monthly precipitation
over this 150-year record, with 10% and 90%
90%risks based on a wide
investigating
precipitation amounts shown using error bars. range of global (coarse-scale) and
regional10%
250
Natural variability in rainfall is very high in this (finer-scale) climate models
region, particularly during the rainy season.
200 For 10 months of the year the 10th percentile and/or using statistical downscaling
2005
mm/month
precipitation amount is zero. techniques. At present, there are
150 many global
2004 climate models to draw
from, but far fewer regional models.
100 2003 in some parts of the
Furthermore,
world the global climate models
2002
50 are not good at simulating baseline
climate 2001
conditions, nor are they
0 in agreement about projections
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
of future2000
changes, particularly in
Month relation to precipitation (see Figure
Average (50%) precipitation by month (in mm). Bars show 10% and 90%
2 above1999
for an example). These
precipitation amounts over the 1901-1970 period kinds of model uncertainties are not
1998
untypical, particularly in areas where
Data from this long-term precipitation record show no
250
discernible trend in winter precipitation. There is, however, a
the topography
1997 is complex (highly
slight upward trend in precipitation during the summer and mountainous regions or coastal areas)
rainy season for Lahore City. 1996 with monsoon or
200
and in regions
tropical climates. According to the
1995
IPCC’s Fourth Assessment Report:
mm/month
150
1994
“There are substantial inter-model
100 differences in representing monsoon
processes, and a lack of clarity over
changes in ENSO [El Niño Southern
50
Oscillation] further contributes to
uncertainty about future regional
0 monsoon and tropical cyclone
1861
1865
1869
1873
1877
1881
1885
1889
1893
1897
1901
1905
1909
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
behaviour. Consequently, quantitative
Year estimates of projected precipitation
Total winter (DJFM) precipitation (mm/month) change are difficult to obtain” (IPCC
Source: KNMI (Royal Netherlands Meteorological Institute), available online at http://climexp.knmi.nl 2007b, sec. 11.4).
There is high confidence that the Nevertheless, in any given location, Coarse spatial resolution of climate
climate in the coming decades there are uncertainties about models. Because of the coarse spatial
will change rapidly and will not precisely what future climate resolution (typically 2.5o x 2.5o) of
be like the relative stable climate conditions will be experienced, and the grid used in GCMs, they provide
of the recent past. In particular, approaches have been developed “smoothed” estimates of future
projected temperature changes by climate scientists to characterize changes. However, if the topography
are well characterized, and these, as have approaches to robust within an individual 2.5o x 2.5o grid
agreement between the different decision making in the face of these square is highly variable (as is the case
climate models is generally good. uncertainties. The key dimensions for the location of Khimti 1), then the
Additionally, changes in future of uncertainty are outlined below, local changes may be higher or lower
emissions of greenhouse and other along with discussion of how than the smoothed estimates. The
gases that affect the climate can each dimension could be better recommended approaches to tackling
be understood with relatively high understood. this are to generate downscaled
confidence on the timescales of projections using regional climate
relevance to the private sector by models or statistical downscaling tools,
using a range of emissions scenarios driven by multiple GCMs. However,
in risk assessments. in areas where the global climate
models are not in agreement, there
Climate Risk and Business | Practical Methods for Assessing Risk 11is little to be gained by undertaking Figure 8: Seasonal Yield Cycles in Different Countries Compared to Seasonal
downscaling. This was deemed to be Yields at GOPDC, Kwae Plantations, for 1988–97 Years of Harvest
the case for all three pilot studies. Percentage of annual total yield in each month at Kwae
(averaged across 1988 - 1997 YOH)
Changes in climatic extremes and 20%
timescales of projections. To evaluate 18%
the full range of risks posed by
16%
climate change to an investment, it
Percent of annual total in each month
is important to consider changes in 14%
both long-term average and extreme 12%
climatic conditions. However, in 10%
general, there is very little information
8%
available on changes in extremes
(e.g., 1-in-100-year storm-surge 6%
height, maximum hourly rainfall 4%
intensity), and what is available is 2%
often only for the end of the 21st 0%
century. There are various reasons for JAN FEB MAR APR MAY JUN JULY AUG SEPT OCT NOV DEC
Month
this information gap, including a lack
of data on observed extreme events
Average tonnes %
(by nature of their rarity), which Source: Adapted from Corley and Tinker 2003
constrains the ability of climatologists
to understand how they may change help to develop understanding of the regions with more uniform climates,
in the future, as well as limitations in relationships between climatic factors such as Malaysia. This annual cycling
the amount of climate model data and their impacts on different systems is reported to have a large influence
that are stored by meteorological and can build generic system models. on yield even in regions that lack
offices around the world. It is clear Second, provided that such models marked seasonal variations in climatic
that additional investment in research are made accessible, private-sector factors, and it also persists in irrigated
by public-sector organizations could stakeholders can adapt them to better conditions. Figure 8 compares the
be usefully targeted to addressing represent the specific conditions for seasonal yield cycles in four oil-
this important gap. their investments. palm-producing countries to that
at GOPDC, demonstrating that in
ASSESSMENTS OF RISK TO To appreciate this complexity, consider addition to seasonal variability within
INVESTMENT PERFORMANCE the analyses of the relationships each country, there is also significant
between oil palm yield at GOPDC variation in the yield cycle across
As noted, evaluating climate change and the climatic and nonclimatic countries. This means that in order to
risks to the performance of the pilot factors which influence it. In general, fully understand the range of factors
study projects required understanding oil palm yield is affected by a range affecting oil palm yield in any given
the relationships between of nonclimatic factors, including location, a specific model must be
climatic factors and the aspects of palm age, soil type, seed type and developed for that country.
performance being considered. In management practices. Yield is also
most cases for the pilot studies, affected by the abundance of oil palm Complexity is further compounded
this required knowledge which pollinators and outbreaks of pests by the numerous stages in the
was not already available. Where and diseases, both of which can be development of oil palm fruits (from
possible, within the resource and influenced by climate. Disentangling which crude palm oil is extracted), each
data constraints of the pilot studies, these influences is a major research of which is differently vulnerable to
statistical models were constructed undertaking, and it appears that no climatic conditions. Table 3 summarizes
to represent these relationships. model currently exists which captures the stages which determine the final
However, the development of all these factors. inflorescence and bunch characteristics
system models is often fraught with of oil palm, as reported in different
complexity, and uncertainties about Furthermore, large seasonal variations studies. It is clear that there is much
system response to climatic and in oil palm yield are expected in variation in the lengths of oil palm
nonclimatic factors constrain the regions such as West Africa, where development stages reported in the
robustness of these assessments. severe dry periods are common. literature, so attempts to correlate
There are two stakeholder groups who However, researchers have reported observed climate data to oil palm yields
can help to address these constraints. that similar, though less extreme, are difficult to undertake.
First, publicly funded research can seasonal variations are also evident in
12 Climate Risk and Business | Practical Methods for Assessing RiskANALYSIS AND TABLE 3: DEVELOPMENT STAGES OF OIL PALM FRUIT COMPONENTS,
RECOMMENDATIONS ON ACCORDING TO VARIOUS STUDIES
ADAPTATION ACTIONS
Approximate months before harvest
As is clear from the preceding
discussion, undertaking robust risk
assessments for the pilot studies Breure and Oboh and Corley and Tinker
was a complex process, and Menendez Fakorede 2003, various
future improvements will require Development stage 1990, Malaysia 1990, Nigeria studies/locations
investment in research at all steps Inflorescence initiation 38 — 44 (Ivory Coast). Corley
in the risk assessment chain. Until also found a range
these uncertainties are better of 26–37 months for
resolved, it can be difficult to justify different clones.
expenditure on physical adaptation Sex determination 18 30 21–29
actions to clients. For instance,
Inflorescence abortion 11 11 9 –10
design standards for assets aimed at
Flowers per spikelet 19 — 12–15
preventing pollution from facilities
are often based on extreme events Spikelet number 24 17–24 Within 9 months
(e.g., site drainage systems and mine Frame weight (stalk 7–9 — No clear response
tailings dams are designed based plus spikelet)
on anticipated extreme precipitation Anthesis and fruit set 6 — 5
amounts), but until there is better
understanding of how the intensity
or frequency of such events will For some of the systems evaluated
change in the future, it would not in the pilot studies, the study teams Undertaking robust
be sensible to propose that a client
upgrade existing infrastructure. There
were able to work with the client to
develop a sound understanding of
risk assessments
are, however, often opportunities the risks, which provided a good basis for the pilot studies
to build in resilience against future
climate changes at lower cost when
for decision making on adaptation.
The strongest examples of this relate was a complex
designing new facilities. to risks associated with increases in process, and future
average temperatures, which affect
power production at Packages and improvements will
refinery output at GOPDC (as shown
in Table 2 and Figure 5 above).
require investment
in research at all
steps in the risk
assessment chain.
Climate Risk and Business | Practical Methods for Assessing Risk 13General results and conclusions
MOST SIGNIFICANT RISKS • Systems are highly sensitive to Water resources are a key
AND UNCERTAINTIES changes in climatic factors. concern
For instance, GOPDC’s refinery
In general, on the timescales of and fractionation plants are A feature of all the pilot studies (in
relevance to private sector investments, sensitive to small increases in common with the majority of private
changes in monthly, seasonal, or cooling water temperature, sector investments) is their reliance
annual average climate conditions which reduce the effectiveness on water resources.
are small (on the order of 1oC–2oC of vacuum-producing systems
temperature increases and +/– 5 to 10 and extend crystallization times. Khimti 1 hydropower scheme river
percent changes in precipitation). As a Hence, production rates of flows. For Khimti 1, clearly, the
result, the pilot study analyses indicate olein and stearin are reduced. output of the hydropower scheme
that the most significant risks on these Variations in temperature from is dependent on flows in the Khimti
timescales are where: day to night already have Khola River. Owing to uncertainties
significant impacts on crude about future changes in rainfall and
• Existing climatic vulnerabilities palm oil throughput at the about modeling the impacts of these
may be exacerbated and critical refinery when cooling water changes on river flows, it was not
thresholds crossed. temperatures exceed the design possible to determine with confidence
For instance, for the Khimti 1 threshold of 32oC. Throughput how climate change will affect flows.
hydropower scheme, HPL is can be 20 percent lower in the The variations projected for the
under an obligation to maintain daytime, when it is hotter. In 2020s, using four climate models and
dry-weather flows in the Khimti future, the vacuum systems three emissions scenarios, are shown
Khola River above certain levels are expected to become less in Figure 9. From the point of view of
downstream of the Khimti 1 effective as temperatures rise power production, changes in flows
intake. If climate change were (see Figure 5 earlier), and in the dry season are the most critical,
to lead to greater incidence of crystallization times will extend, because monsoon flows exceed
low flows, then the requirement leading to a reduction in olein Khimti 1 capacity by a large margin.
to meet this critical threshold and stearin output. An extra In the dry months, the modeling
could affect the power produced cooling tower has recently indicates that flows could change by
at Khimti 1. In actual fact, the been installed at GOPDC to about +/– 10 percent by the 2020s.
modeling undertaken in the serve the refinery. This will It should be noted that the model
Khimti 1 pilot study did not help to reduce the impact of outputs become more consistent over
indicate that the risk of flows rising temperatures on refinery time; by the 2050s there is a clearer
falling below this threshold would output, though it will not indication of an increase in dry-season
be exacerbated in the future. completely eliminate it. flows.
Climate Risk and Business | Practical Methods for Assessing Risk 15A feature of all the Figure 9: Monthly Projections of Stream Flow at Rasnalu Flow Gauging Station
(close to Khimti 1 intake), under Four GCMs for the 2020s, Using Empirical
pilot studies (in River Flow Models
common with the
majority of private 80 15%
Change in monthly average streamflow (%)
NB Monthly average streamflow (m3/s)
70 10%
sector investments) 60
5%
is their reliance on 50
0%
water resources. 40
30
-5%
-10%
20
Groundwater at Packages and 10 -15%
GOPDC. Both Packages and GOPDC 0 -20%
rely on groundwater for their
Magh
(Jan-Feb)
Falgun
(Feb- Mar)
Chairta
(Mar- Apr)
Baishak
(Apr- May)
Jestha
(May-Jun)
Ashad
(Jun -Jul)
Srawan-
(Jul-Aug)
Bhadra-
(Aug- Sep)
Ashoj-
(Sep-Oct)
Kartik
(Oct-Nov)
Marg-
(Nov Dec)
Poush
(Dec-Jan)
industrial operations (pulp and
paper production at Packages, and
production of crude palm oil and
Ave Observed streamflow GFDL-CM2.0, 2005 - SRES A2 (10-yr mean) (% change)
olein and stearin at GOPDC’s mill
GFDL-CM2.0, 2005 - SRES A2 (10-yr mean)
and refinery). For Packages, growth CGCM3.1(T63), 2005 - SRES B1 (% change)
CGCM3.1(T63),2005 - SRES B1
of wheat straw, which is one of the CSIRO-Mk3.5 - SRES A2
CSIRO-Mk3.5 - SRES A2 (% change)
inputs to its pulp and paper mills, GISS-ER, 2004 - SRES A1B GISS-ER, 2004 - SRES A1B (% change)
also relies on groundwater irrigation,
Note: Projections are for Nepalese months, as shown on the x-axis.
and GOPDC’s oil palm nursery is
irrigated using groundwater. Figure 10: Factors Affecting the Way Human Activities Impact Freshwater Resources
These dependencies mean that
any changes in the availability of Water
Greenhouse Climate
groundwater resources could pose quantity and
gas emissions change
quantity
significant risks to the investments.
Yet the pilot studies indicate that
the vulnerabilities of these resources
to climatic and nonclimatic factors Population,
Water
lifestyle,
are not currently well understood. economy,
Land use resources
The complex links between climate management
technology
change and other factors influencing
water supply and demand are
highlighted in Figure 10.
Water
demand
Groundwater is something of a
hidden resource, by virtue of its not
Source: Modified from Oki 2005
being visible. While both Packages
and GOPDC monitor groundwater
levels in boreholes, neither company the aquifers they are using to better emissions scenarios. The results of
has undertaken a wider assessment understand the factors that influence this risk assessment are presented
of the climatic and nonclimatic their recharge. Based on such in Figure 11. As shown in the
factors influencing the aquifers that surveys, models of the aquifers could figure, the majority of the model
they are using. Improved long-term be constructed to provide the basis runs indicate a future increase in
monitoring could include researching for future resource management. groundwater recharge. Using the
the relationship between borehole Amritsar groundwater model, 77
water levels and climatic variables, To evaluate risks from climate percent of the model results show
considering time delays between change for groundwater recharge an increase for the 2020s, and 67
climatic events and their impacts on at Packages, the pilot study used percent do for the 2040s. Using
groundwater levels. The companies two groundwater models, driven the CATCHMOD model, about 88
could also consider commissioning by climate change scenarios from percent of the model projections
surveys of the catchment areas for multiple GCMs, under three show an increase in both time
16 Climate Risk and Business | Practical Methods for Assessing Riskperiods. This is because nearly 75 Figure 11: Frequency of Projected Groundwater Recharge, as Calculated Using
percent of precipitation in the region Two Groundwater Modeling Methods
falls during the monsoon season,
and this is when most of the natural 10
Model result frequency
recharge occurs, through water
8
being absorbed into the soil rather
than evaporating. Most of the 6
climate models project an increase in 4
monsoon-season precipitation.
2
While this kind of assessment is 0
very useful for characterizing the -40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 more
uncertainties in future recharge, Percent change in recharge (Amritsar) for the 2020s
it is important to note that to
understand fully future risks, changes SRES A1B (13 models) SRES A2 (13 models) SRES B2 (13 models)
in groundwater demand by Packages 6
Model result frequency
and other users (e.g., for crop
5
irrigation) related to climate and
socioeconomic changes need to be 4
evaluated. 3
2
Low-probability / high- 1
consequence events
0
-40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 more
There are significant unknowns Percent change in recharge (CATCHMOD) for the 2020s
regarding future changes in the
occurrence of low-probability SRES A1B (13 models) SRES A2 (13 models) SRES B2 (13 models)
(extreme) / high-consequence events.
These could represent the highest 10
Model result frequency
risks to the pilot study clients, but it 8
was not possible to evaluate their
6
significance. The notable examples of
these from the Khimti 1 and GOPDC 4
pilot studies are highlighted in Table 4.
2
Further research and monitoring to 0
-40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 more
help evaluate the significance of these
Percent change in recharge (Amritsar) for the 2040s
risks, though challenging, would be
very worthwhile, because when these
SRES A1B (13 models) SRES A2 (13 models) SRES B2 (13 models)
unlikely events occur, they can have
very large financial consequences. 10
Model result frequency
For GOPDC, a single outbreak of
the leaf miner (a pest which causes 8
widespread defoliation of oil palms) 6
could lead to revenues not earned of
$1.8 million. An outbreak occurred 4
at GOPDC’s plantation in 1987, 2
and 13,000 tons of oil palm fresh
fruit bunches (from which the palm 0
-40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 more
oil is extracted) were lost. The leaf Percent change in recharge (CATCHMOD) for the 2040s
miner is known to be sensitive to
temperature, rainfall and carbon SRES A1B (13 models) SRES A2 (13 models) SRES B2 (13 models)
dioxide concentrations, but there is
little information on these sensitivities,
Note: Projections for the 2020s are shown in the top two figures and for the 2040s in the
and the impacts of climate change on bottom two figures.
leaf miner incidence have not been
researched in any depth.
Climate Risk and Business | Practical Methods for Assessing Risk 17TEMPERATURE-RELATED TABLE 4: LOW-PROBABILITY / HIGH-CONSEQUENCE EVENTS FOR KHIMTI 1
IMPACTS ON INDUSTRIAL AND GOPDC
PROCESSES CAN BE WELL
Khimti 1 GOPDC
CHARACTERIZED
Extreme flood event on Khimti Khola and Oil palm pest or disease outbreak
As noted above, climate models are Tami Koshi rivers Loss of natural oil palm pollinator
generally in good agreement about Landslide blocking Khimti Khola River and
future increases in temperature. access road to site
The impacts of rising temperatures Glacial lake outburst flood
on industrial processes at GOPDC
and Packages were evaluated with In the case of GOPDC, one financial Packages generates power on-site and
a higher degree of confidence impact associated with rising sells surplus power to the grid. The
than other issues, because the temperatures is the reduction in condensing steam turbine efficiency
relationships between temperature olein and stearin production (see at the power plant is slightly reduced
and process performance are well Figure 5 above). The relationship by temperature increases, and again,
understood. In general, industrial between temperature and the relationship is well understood (see
equipment that generates heat (e.g., production rates was recorded on- Figure 12). This information allows a
turbines, compressors, motors) is site by GOPDC’s refinery production highly confident projection of a small
likely to see some efficiency losses manager and was established with a reduction in Packages’ future income
due to the higher temperatures high degree of confidence. from power sales (as shown above in
expected under climate change. Table 2).
Further research Figure 12: Power Output of Packages’ 41 MW Siemens Condensing Steam
and monitoring Turbine with Double Extraction vs. Cooling Water Temperature
to help evaluate 37 Efficiency=75%
the significance of Power factor=0.85 NB
these risks, though 36
challenging, would
Power output, MW
35
be very worthwhile,
because when 34
these unlikely
events occur, they 33
Baseline cooling water temperature
can have very 32
large financial 31.8 32.0 32.2 32.4 32.6 32.8 33.0 33.2 33.4 33.6 33.8 34.0
consequences. Cooling water temperature, ºC
18 Climate Risk and Business | Practical Methods for Assessing RiskFROM UNCERTAINTY Figure 13: Quality of Knowledge of Climate Change Risks to GOPDC
TO RISK
Risk is a function of two dimensions:
Good
the probability of a hazard and the
Ambiguity about the risk e.g. Good knowledge of the risk e.g.
magnitude of its consequence. The
quality of knowledge of each of • uncertain or unknown impacts • unchanging climate
these dimensions is a measure of • no impact models • good historical data
how well a risk is understood (see • uncertain how to value • good impact models
consequences • short term prediction
Figure 13). • lack of concern
As outlined earlier, information
Knowledge of probability
on future changes in extreme
climatic events is scarce, and there
is uncertainty in all the pilot studies
locations about whether seasonal
average precipitation will decrease or
increase in the future—the quality of Ignorance about the risk e.g. Impacts well defined but
knowledge about the probability of probability uncertain e.g.
• rapidly changing climate
these changing hazards is poor. • new/unknown processes • poor knowledge of likelihood
• complex dependencies, such as of damage
For some of the issues explored in the non-linearity • good impact/process models
pilot studies, there was little evidence • longer term forecast • well defined impacts if event
• insufficient data occurs
about how the system would be • climate surprises • longer term assessment
affected by changes in climate. For
instance, literature is lacking on how
Poor
the presence of GOPDC’s natural oil
palm pollinator and the leaf miner
pest are correlated with climatic Poor Good
Knowledge of consequence
factors. Yet, total loss of the pollinator
would have an estimated financial Source: Willows and Connell 2003
impact for GOPDC of more than
$1 million per annum. A major leaf
miner outbreak could lead to revenues On the other hand, temperature- The potentially significant financial
not earned of $1.8 million per annum. related risks to industrial operations at consequences outlined above provide
Lack of availability of groundwater at GOPDC could be quantified with some a strong signal on the areas where
GOPDC would lead to the mill and precision, because both the probability future efforts to reduce uncertainties
refinery being shut down, but the of the hazard and the magnitude of its should be focused, so that risks can
sensitivity of this resource to climate consequence were known with a good be better understood and appropriate
change is unknown. degree of confidence. adaptation actions undertaken.
Climate Risk and Business | Practical Methods for Assessing Risk 19Annex 1: A risk-based approach
Figure 14 illustrates the risk- Figure 14: Climate Risk Assessment and Management Framework Used in the
uncertainty decision-making Pilot Studies
framework which forms the basis
How can we ensure that the
of the pilot study methodology. The investment continues to deliver
framework was developed by the successfully on its objectives in the
U.K. Climate Impacts Programme face of climate change?
(UKCIP) and the U.K. Environment What are the opportunities from
What is the investment climate change for the investment? What are the
Agency (Willows and Connell 2003). aiming to achieve? success criteria for
It sets out eight stages, of which the assessing risks and
first six were followed in the studies. 1 Identify problem
and objectives
adaptation
The key questions addressed at each options? (Consider
critical climate-
stage of the process are shown on 2 Establish decision-
related thresholds
making criteria,
the figure. 8 Monitor receptors, ex posure units and and sensitivities,
risk assessment endpoint s
legislation, cost,
Stages 5 and 6 were explored 3 Assess ri sk
risk attitude etc.)
in less depth than stages 1–4, What are the
because these later stages required climate-
knowledge of the costs and benefits 7 Implement related risks
decision
of adaptation options, which was to success (as
5 Appraise 4 Identify defined in
not readily available. options options
Stage 2) using
best available
No No climate data?
In practical terms, the pilot studies
Yes
involved: Pr oblem
defined Yes Criteria met ?
correctly? How well do the What are the
• a visit to the project site (except adaptation options adaptation options
6 Make decisio n
perform against the that should be
in the case of Packages), considered to
success criteria (as
• meetings with the IFC client, What are the ‘best’ defined in Stage 2)? address the risks
to discuss climatic sensitivities adaptation options for identified in Stage 3?
the investment?
and vulnerabilities, obtain data,
reports, and so forth, Source: Willows and Connell 2003
• meetings with in-country
sector experts and climate
change experts from the public The specific risk areas considered
sector, research institutions, varied from study to study (see Table
universities, and community 1 above), but in general terms,
groups, all the studies aimed to provide
• literature reviews and qualitative a holistic approach by analyzing
analysis of impacts, and risks to the technical/operational,
• quantitative assessments of environmental, social and financial
impacts, where possible. performance of the investments.
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