Professional Documents
Culture Documents
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
Annex 3: Acknowledgments 38
References 39
Introduction
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 RISKS TO
INVESTMENT PERFORMANCE
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.
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.
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
seldom available. 4. Special Report on Emissions Scenarios; IPCC 2007a, “Summary for Policymakers”
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
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
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.
-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
Further research Figure 12: Power Output of Packages’ 41 MW Siemens Condensing Steam
and monitoring Turbine with Double Extraction vs. Cooling Water Temperature
challenging, would
Power output, MW
35
be very worthwhile,
because when 34
these unlikely
events occur, they 33
Baseline cooling water temperature
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
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
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.
Other aspects of
community well-being
are also vulnerable
to climate, including
transport, health, and
water quality.
Glacial lake Combination of Glacial retreat is It is not known if a High confidence Reinstate early
outburst temperature and occurring all over GLOF would affect in projections warning remote
flood (GLOF) precipitation the Himalayas. As Khimti 1. Insufficient of higher monitoring systems.
temperatures increase information is available temperatures. (Nepal Government)
the rate of retreat is to undertake a flood-
accelerating. risk assessment. Low confidence in Undertake a
ability to calculate detailed flood-risk
The risks associated HPL’s insurance cover financial impacts, assessment. (HPL)
with the glacial retreat does provide for resulting from
in the Tama Koshi protection in the event lack of baseline
catchment are well of a GLOF. information.
documented. Remedial
works have been
undertaken to the Tsho
Rolpa glacial lake.
Other aspects of
community well-being
are also vulnerable
to climate, including
transport, health, water
availability, and water
quality.
We would like to thank the experts and members of the following institutions who have contributed to the elaboration
of the Case Studies.
Breure and Menendez. 1990. In Rainfall impact on Oil Palm Production and OER at FELDA Triang 2, ed. Muhamad Rizal.
Corley, R. H. V., and P. B. Tinker. 2003. The Oil Palm. 4th ed. Hoboken, NJ: Wiley.
IPCC (Intergovernmental Panel on Climate Change). 2007a. Climate Change 2007: Synthesis Report; Contribution of
Working Groups I, II and III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change,
ed. R. K. Pachauri and A. Reisinger. Geneva: IPCC.
———. 2007b. Climate Change 2007:The Physical Science Basis; Contribution of Working Group I to the Fourth
Assessment Report of the Intergovernmental Panel on Climate Change, ed. S. Solomon, D. Qin, M. Manning, Z.
Chen, M. Marquis, K. B. Avery, M. Tignor, and H. L. Miller. Cambridge, U.K.: Cambridge University Press.
———. 2007c. Climate Change 2007: Impacts, Adaptation and Vulnerability; Contribution of Working Group II to the
Fourth Assessment Report of the Intergovernmental Panel on Climate Change, ed. M. L. Parry, O. F. Canziani, J. P.
Palutikof, P. J. van der Linden, and C. E. Hanson. Cambridge, U.K.: Cambridge University Press.
McSweeney, C., M. New, and G. Lizcano. 2008. “UNDP Climate Change Country Profiles—Ghana.” School of
Geography and Environment, University of Oxford. http://country-profiles.geog.ox.ac.uk.
Oboh, B. O., and M. A. B. Fakorede. 1999. “Effects of Weather on Yield Components of the Oil Palm in a Forest
Location in Nigeria.” Journal of Oil Palm Research 11 (1): 79–89.
Oki, T. 2005. “The Hydrologic Cycles and Global Circulation.” In Encyclopaedia of Hydrological Sciences, ed. M. G.
Anderson. Chichester, U.K.: John Wiley & Sons.
Willows, R. I., and R. K. Connell, eds. 2003. Climate Adaptation: Risk, Uncertainty and Decision-Making. Technical
report. Oxford, U.K.: UKCIP.
The material in this publication is copyrighted. IFC encourages the dissemination of the content for
educational purposes. Content from this publication may be used freely without prior permission,
provided that clear attribution is given to IFC and that content is not used for commercial purposes.
The findings, interpretations, views, and conclusions expressed herein are those of the authors
and do not necessarily reflect the views of the Executive Directors of the International Finance
Corporation or of the International Bank for Reconstruction and Development (the World Bank) or
the governments they represent, or those of Himal Power Limited, Ghana Oil Palm Development
Company, Packages Ltd, and the individuals and institutions listed in Annex 3.