5. Multi-criteria Decision Aid (MCDA)
7.1 Business Risks Driven by Climate Change
7 Analysis and Discussions
7.1 Business Risks Driven by Climate Change
Carbon Point‘s (2010) finding that new regulations represent a big change management requirement, which places organisations in a state of operational risk given the tight financial budgets as a result of the continued global recession. Environmental regulations were mentioned by all the executives interviewed within Tongaat Hulett as key negative drivers (risks) in their business. The possibility of new and more stringent environmental legislation, coupled with talk within policy circles of more stringent policing, is creating unprecedented incentives for Tongaat Hulett, ATNS and business in general to proactively manage that risk.
Because ATNS is a member of the International Civil Aviation Organisation (ICAO), complying with ICAO directives and legislation in order to maintain the license to operate is a key driver for climate change response.
Other business risk areas include brand value; political and legitimacy and the associated license to operate risks; credit ratings; and recruitment or staff retention (not yet a key issue in the South African corporate environment).
7.1.4 Reputational Risks
Failure to comply with climate change regulations and legislation and failure to demonstrate to stakeholders the responsiveness to environmental sustainability challenges represent big threats to corporate reputations. This is in line with the Economist Intelligence Unit‘s 2005 reputational risk report, where executives reported that reputation was an important corporate asset which was difficult to protect due to the development of global media and communication channels, increased scrutiny from regulators and reduced customer loyalty. Boycotts and consumer action such as the 2010 BP boycott and BP‘s subsequent expulsion from the Dow Jones Sustainability Index (Rueters, 2011), or the uprising against Coca Cola in Palakkad India (The Statesman, 2003), can spread faster and further than ever before and cause untold damages to corporate brands.
7.1.5 Investor and Shareholder Risks
A 2009 Trucost research on the carbon risks and opportunities for the Top 500 US companies on the S & P 500 showed that a shareholders and investors are more concerned about climate change liabilities. This finding was also confirmed in a 2010 Camco and TIPS study of the risks
and opportunities for the South African economy. Shareholders‘ stance towards companies‘
attitudes on climate change response have shifted in the last five years. The Pew Center (2009) reported that in 2008, 54 climate resolutions were filed with companies by shareholders. The companies in the study were wary of shareholder expectations regarding climate change response. One of the companies in the study specifically mentioned the need to be in line with shareholder expectations on climate change response during the interviews. The other company mentioned it broadly in its sustainability strategy statement.
7.1.6 Business Model Redundancy
Business model redundancy and cost disadvantages are the other operational and strategic climate change-induced risks confronting businesses.
Propositions
All the above risks were strong drivers for climate change response in this study. Climate-smart companies are instituting a robust risk culture focused on optimising risk-return trade-offs and turning them into competitive advantage. They are ensuring that climate change strategic decision making is risk-adjusted to focus on balancing risk-taking and risk avoidance as part of risk management strategy. Moving from a compliance-based risk posture to a growth-oriented stance, where a business is willing and positioned to take calculated risks and is taking a systematic look at the profitability of a business - especially in a down economy - can lead to surprising opportunities for new and profitable initiatives. This finding can be summarised in the first proposition:
Proposition 1:
Where the effects of climate-change induced risks are considered high, businesses are prepared to put in the extra resources to deal with the risks as part of overall risk management strategies.
Taking a risk-adjusted view and avoiding biases that mislead decision makers can assist companies to make correct strategic decisions. By combining risk management with strategic management and ensuring that risk-taking and risk avoidance is part of one integrated management dialogue, businesses can turn climate change-induced risks into opportunities to
create competitive advantage. The operationalization of this approach can be formally stated as:
Proposition 2:
By using a structured analytical approach employing multi-criteria decision aid tools, executives can clearly synthesise all information, to understand the value- creating and value-protecting levers of climate change response for competitive advantage.
Reputational capital has become a measure of extra financial value and business success (Obloj
& Obloj, 2006), so that climate change-induced reputational risk is regarded as a significant issue in the two organisations in the study. The proactive management of the influence of stakeholders (whose relationship with the organizations is directly instrumental to the pursuit of long-term growth) such as climate change activists, non-governmental organisations, communities, shareholders, customers, suppliers and consumers, is crucial to maximizing consensus and minimizing conflict. Some companies are seizing these stakeholder engagements as opportunities to influence regulatory and legislative outcomes to their advantage because uncertainty over how different countries are implementing climate change legislation is increasing the risk of regulatory arbitrage which has significant bearings on global competitiveness. ATNS, one of the companies in the study, is leveraging climate change communication programmes increase collaboration in other areas of business as well. They are seeing opportunities to increase the equity of their brand not only among African counterparties but within the whole of the aviation industry. Improving the quality and timeliness of stakeholder interactions can ensure inclusion of their diverse interests and assist companies to come up with the best balanced choice response options that engender key stakeholder trust and support. This can be summarized in the next proposition:
Proposition 3:
Multi-criteria models provide a collaborative and efficient means for timely incorporation of stakeholder preferences in climate change response decisions to manage organizational legitimacy risks.