Four Studies That Ponder the Road from Here

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Our world these days seems to be a succession of forks in the road, points at which decisions need to be made about which pathway we collectively must take. In nearly every case, there’s an unsustainable "business as usual" scenario (often shortened, unappealingly, to BAU) along with one or more alternatives.

Each presents any number of quandaries about whether, how, and how aggressively to address the challenges at hand, whether economic revival, health care or electoral reform, social equity — and, of course, the array of environmental and resource challenges that confront us. (Never mind that all of these issues are connected. Much as it would be ideal to address them holistically, that doesn’t seem to be in the cards.)

And so it’s not surprising, as 2009 sputters to an end — as we anticipate an intensifying global debate on climate, address our growing global need for energy, consider our options for ensuring an adequate water supply, and plot the surest footing possible for commerce and investment — that we would see the unleashing of a mild torrent of studies and findings in recent weeks. Each tackles intriguing and important questions, summarizing the opinions and conclusions of scientists, corporate executives, business leaders, and others. And each offers some roadmap of where to go from here.

I’ve been perusing a subset of the recent research spanning a range of topics. Herewith is a summary of four reports that offer valuable food for thought.

To begin, there’s "Managing the Unavoidable" (PDF – registration required), by Henderson Global Investors, Insight Investment, RAILPEN Investments, and the Universities Superannuation Scheme. The group aimed to better understand the impact of climate change on companies and their investors in four sectors: electric utilities, oil and gas, real estate, and water utilities. The focus was on climate change adaptation, not mitigation — that is, how companies in these sectors will shift their products, processes, and policies to succeed in a world grown warmer, but not necessarily what they’ll do to help prevent warming in the first place.

The conclusion: Adaptation is beginning to receive more management attention but, with the exception of the water sector, most companies are focused more on  mitigation. That is, "Companies are more concerned about risks than opportunities," such as the potential to profit from higher rates resulting from disruptions to the electricity supply. That may seem a cynical view, but from a business perspective, it’s a little like automobile manufacturers seizing the opportunity to build ambulances to respond to an increase in auto accidents: So long as the need exists, why leave money on the table?

Of course, this has implications for investors. "We believe that investors need to examine how the risks and opportunities associated with climate change adaptation affect company-specific business models, value drivers, strategy, governance, cashflows and assets," say the authors. Moreover, investors "should ensure that companies have appropriate governance and management systems in place," such as robust risk identification and assessment processes, clear strategies for managing and responding to climate change, and clear reporting on risk assessment and management processes and on the company’s views on the materiality of climate change-related risks for their business.

Takeaway: Climate change adaptation strategy is becoming a boardroom issue. It may no longer be enough to measure and manage one’s carbon footprint. Companies that don’t have a strategy to adapt to climate change may find themselves reeling from "surprises" they might have otherwise anticipated.

A similar, sector-specific concern was expressed by the insurance giant Allianz and the nonprofit environmental group WWF in a report on "Major Tipping Points in the Earth’s Climate System and Consequences for the Insurance Sector" (PDF). It ponders the small changes that, at some point, could cause big changes in weather, sea levels, and other things. It chronicles several potential consequences — sea-level rise along North American coasts, Indian Summer monsoons in Asia, Amazon die-back and drought, desertification of the southwestern U.S. — and the "insurance aspects" for each.

Their conclusion: We’re hopelessly in the dark about what these things mean financially.

Despite their potential to affect very significant numbers of people and assets, these tipping points are virtually absent from policy and decision contexts concerning what changes in temperature or other variables constitute "dangerous climate change." Work to provide early warning of such tipping elements could help us adapt to or mitigate them. But getting companies to take action on the basis of such early warnings is, arguably, the greater challenge.

Takeaway: The impacts of climate change on companies may not come through horrific, sudden hurricanes, fires, or other calamities, but through seemingly small changes that rapidly turn into big ones. Once again, the need to anticipate and plan for various climate scenarios is rising in importance in some industries.

"Charting Our Water Future" (PDF), by the Water Resources Group — an ad hoc association that includes the World Bank, the consultancy McKinsey & Co., and companies like Coca-Cola, SABMiller, Nestlé, and Sygenta — set out to "shine a light on water resource economics." The study looks at the water worlds in four countries — India, China, Brazil, and South Africa — and examines each region’s challenges and solutions, including how to "unlock" the transformation of the water sector.

The report points up how little most of us know about water, let alone about the water realities of these disparate regions. It talks us through such basics as water supply and demand, quantity and quality, as well as the various types of water needed for various purposes, from ultra-pure water to potable water to gray water; four different types of water metrics; and the distinction between "blue water" (that found in rivers, lakes, and other bodies of water) to "green water" (water that naturally infiltrates the soil from precipitation). These are important concepts and distinctions that need to be widely understood if companies, policy makers, public agencies, water utilities, and others are to effectively manage the world’s water supply.

One stark reality is the inefficient use of water by agriculture, which accounts for about 80 percent of water use. Roughly 80 percent of that can be used more efficiently through "productivity levers" — that is, measures that increase the yields of individual fields, offsetting the need for additional land and additional irrigation. These include no-till farming, improved drainage, optimized fertilizer use, germplasm or other seed development, and the application of something called "crop stress management."

But it’s not just ag. In China, where industrial and urban water use are the fastest growing uses of water, the Water Resources Group identified aggressive, industrial efficiency measures whose cost is negative (including annualized capital and net operating expenditures), producing net annual savings of approximately $21.7 billion. In South Africa, industrial measures such as paste-thickening in mining and pulverized-bed combustion in power production could generate up to $340 million in annual net savings — again, including capital expenditures and operational costs — while dramatically cutting water use.

In each country, the potential for reducing the gap between supply and demand comes from different private-sector initiatives. "The cost curve thus empowers the private sector to engage meaningfully on defining the institutional mechanisms of the future."

Takeaway: Much as with energy, there’s a strong understanding that "business as usual" is no longer an option in the water sector. Water will be an important investment theme for companies and governments in the coming decades, providing opportunities for those that can provide cost-effective solutions. And there is significant "low-hanging fruit," in which existing technology and water-management strategies can close the gap between what’s available and what’s needed.

Finally, there’s "Betting on Science" (PDF), a report from Accenture that looks at technologies in transport fuels that have the potential to "disrupt" the current views of supply, demand and greenhouse gas emissions in the next decade. You may have thought that the idea of biofuels from plant matter, microbes, and other material had come and gone. (Remember "Live Green, Go Yellow" and "food versus fuel"?) While the hype may have died, the R&D around them is alive and well — genetically engineered feedstocks that increase the yield density and reduce the intensity of pre-treatment and required enzyme; a "diesel" solution through synthetic biology that allows sugar cane to be converted into a clean diesel; microbes that have been able to overcome the toxicity challenges of converting starches and sugars to butanol; genetically modified algae that have higher yields and can be cultivated and harvested at lower cost; and more.

Accenture examined a range of technologies through the lens of scalability (those offering a greater than 20 percent potential impact on hydrocarbon fuel demand by 2030); greenhouse gases (those affording savings greater than 30 percent relative to the hydrocarbon it is replacing); cost (those competitive at an oil price of $45 to $90 per barrel); and time to market (those that could be commercialized in less than five years). The technologies are also divided among three groups: evolutionary, revolutionary, and "game changers."

The last category, it turns out, weren’t biofuels at all, but electricity — that’s right, electric vehicles, plug-ins, and all the rest, along with the controlled charging infrastructure and a "smart grid." It was the middle group — "revolutionary" fuels — that were eye-opening: sugar cane-to-diesel technologies are close to commercial viability, says Accenture; so are "bio-crude," a replacement for geologically sourced crude oil, made from biomass; and biofuels for airlines.

Takeaway: Research and development of oil alternatives is robust, with dozens of companies working to bring a wide range of alternatives to market. The question is no longer if or how these technologies will be commercialized, but when and how fast.

This is, I said, only a sampling of recent studies. There will be more, no doubt, as the Copenhagen climate summit nears, the inevitable end-of-year assessments are unveiled, and as just about everyone opines on Barack Obama’s first 365 days in office.

Their collective conclusions are important. What we do with them is critical.

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