Summary

This case study describes a review of climate-related risks with an international pharmaceutical company that had sophisticated frameworks for governance, risk management and corporate social responsibility (CSG). It outlines how the approach was adjusted to take account of the focus on medium- and long-term effects of climate change and climate policy, the sophistication of the client team, previous risk assessments, and the need to generate an understanding of climate-related uncertainties to support strategic decisions.

Synopsis

The company had a well-established risk management framework in place, and the senior people who engaged with this analysis were all thoroughly familiar with that framework. This allowed us to adjust the normal risk management approach to enhance its efficiency and effectiveness.

Several climate-related risks were already addressed by the company’s existing plans and processes. We were able to focus attention on new matters raised in the analysis and on opportunities to extend the effort devoted to the risks already being addressed. This approach directed attention to the areas where the participants could make the most valuable contribution.

As the participants were well practiced in the appying the company’s ERM framework, it was possible to adopt a less formal approach to evaluating risks than usual without undermining the integrity of the exercise. This encouraged a sense of ownership of the analysis among the participants that, reinforced by careful efforts to ensure that it was comprehensive, built confidence in the process and its outcomes.

It was important, in the context of climate change, to address not only the immediate future, the scope of most risk assessments, but also to include explicit attention to intermediate and long-term concerns. This required some adjustments to the company’s ERM assessment framework. Actions were accepted to review the assessment scales following the workshop to ensure they would support future climate change risk assessments.

Adoption of a flexible approach, while maintaining the integrity of the analysis, fostered engagement by senior personnel conscious of their limited available time. They were able to demonstrate that existing plans already addressed many climate-related risks and show how this foundation was being developed by extending those efforts and by drawing fresh ideas into the process. While no extreme risks were found – which was not surprising given the company’s existing ERM processes – areas where additional investigation and action might be worthwhile were identified.

Background

The pharmaceutical company

The company manufactures a wide range of advanced pharmaceutical products to prevent and treat diseases in people, including medicines, vaccines and biopharmaceuticals, for an international market.

It operates from several large neighbouring sites, with international packaging plants and warehouses to support its overseas customers. Parts of each site are shared with joint venture partners for making specific specialist products. The focus of our work was on the two main manufacturing facilities.

The company has a declared commitment to corporate social responsibility (CSR). It has a strong governance structure, and sophisticated processes for strategic planning, risk management, and environmental and sustainability monitoring and reporting.

Purpose

The company wanted to develop a comprehensive strategy for dealing with climate change and its effects, encompassing:

• Direct effects on manufacturing and business operations, including supply chains
• Indirect effects, including those associated with government and regulatory policies in the countries in which the company operates, and the CSR reporting requirements of securities exchanges and other stakeholders.

The risk workshop was a component of the company’s broad strategy for climate change. The intent of the strategy was to:

• Ensure the company had a risk management framework for climate change that would be flexible and adaptable as new information and new policies relating to the climate came to light
• Provide the company with a realistic view of the climate-related risks it was likely to face, so it could take early action where appropriate
• Enable it to demonstrate to its stakeholders that it had addressed climate change and its effects thoroughly.

Process

Overview

The risk assessment followed the guidelines issued by the Australian Greenhouse Office (AGO, 2006), Climate Change Impacts and Risk Management – A Guide for Business and Government. This approach is aligned with the international standard ISO 31000, Risk management – Guidelines, with the explicit addition of relevant climate change scenarios to the ‘scope, context and criteria’ step. The core process is illustrated in Figure 1. (Note: Broadleaf and colleagues at Marsden Jacob Associates wrote the AGO Guide.)

Workshops

We concentrated on the early parts of the process illustrated in Figure 1:

• Establishing the scope and context, equivalent to the environmental scanning stage of ‘traditional’ strategic planning, with a particular focus in this case study on plausible climate change scenarios that might affect the company and its stakeholders
• Risk assessment, the central three boxes in the diagram, concerned with identifying, analysing and evaluating the main sources of uncertainty for the company in the short, medium and long term.

We facilitated two workshops, one for the scope and context and one for uncertainty (Figure 2). As discussed in the following sections, the activities were tailored for the characteristics of the company, the climate and environment in which it operated, and sound risk management practice. Outcomes from the entire process formed an important input to the company’s strategic planning discussions.

Participants

Workshop participants included the chairs of the company and site risk committees, executive leaders from the main business units, and senior technical and functional managers from the corporate head office and the sites.

All participants had high-level roles in the company and a good grasp of the company’s strategic purpose and objectives. They were all closely involved with strategic planning and decision-making in the company.

Their technical and functional expertise covered manufacturing, operations, supply chains, CSR, commercial development, quality, health and safety, environmental, legal, information technology and automation, engineering, maintenance, human resources, and sales and marketing.

They showed themselves in the discussions and workshops to be a strong, supportive and open-minded team.

Scope and context

Purpose

The context workshop was intended to help ensure that all factors that might be affected by climate change had been considered and that relevant ones would be incorporated in the risk workshop to follow. This was important to ensure that the analysis was comprehensive, and to make it clear to others that nothing significant had been overlooked. It was thus both a tool for managing the risk workshop and a means of communication.

Briefing material

Briefing material for the context workshop was prepared from:

• A wide range of detailed company documents describing its operations and supply chains
• Reports on climate science, climate regulations and policy, and a set of relevant climate scenarios
• The company’s risk management framework and processes, as well as guidance on understanding climate-related uncertainty.

Scope

The primary focus of this exercise was on climate change and its effects on the company. A comprehensive approach was taken, covering:

• The regions in which the company’s manufacturing plants, packaging facilities and warehouses were located
• Regions where important production inputs were sourced or where the company’s supply chains might be vulnerable
• Jurisdictions where changes in climate policies might influence the company.

An overarching feature of the scope was that this analysis had to encompass any risks affecting the business that had their roots in, or might be significantly affected by, climate change.

Stakeholders

Stakeholders had been considered in detail as part of earlier strategic planning activities. This analysis was reviewed and extended, taking account of the climate-related context of interest here.

Two sets of questions were used to guide the discussion:

• Who might be affected indirectly if the company is affected by climate change, and how? (See, for example, Table 1)
• Who might be affected directly by climate change, and how might this impinge upon the company? (See, for example, Table 2).

This helped to identify:

• Potential new concerns of stakeholders who had been identified previously
• Previously unidentified parties with an interest in climate change and the company’s responses to it.

Climate change scenarios

Climate change scenarios were developed for the regions in which the manufacturing plants and supply chains were located. They were based on projections from recent peer-reviewed local and international modelling, and consistent with Intergovernmental Panel on Climate Change (IPCC) mid-range projections for the near term and longer term. They represented ‘best estimate’ climate changes in direction and magnitude, assuming substantial reductions in global greenhouse gas emissions below ‘business-as-usual’ were not achieved in the coming decades.

For most climate variables presented, the greatest uncertainty lay in the magnitude rather than direction of change; in other words, the trends were clear, but the rates of change were less certain. For example, it is virtually certain (> 99% chance) that that there will be global warming over the coming century and that this warming will be accompanied by an increase in frequency of hot days and decrease in frequency of cold days and nights in most areas. Similarly, it is very likely (90-99% chance) that the frequency of heavy rainfall events will increase.

The climate change scenarios addressed factors related to temperature, seasonal rainfall, droughts and floods, storms and wind, and wildfire danger.

Climate policy scenarios

Climate policy scenarios were developed for local and national jurisdictions. They reflected judgements about the most likely direction and, where feasible, the magnitude of changes in policies relevant to the company’s local operations, drawing on currently available information about national and provincial government policies.

Policy scenarios were presented for two time periods: short term (within the next 5 years) and medium term (20 years into the future), beyond which policy forecasting would be unreasonable.

As with the climate change scenarios, the level of confidence in the direction of policy was significantly greater than in the magnitude of changes, which in most cases were highly uncertain, even in the short term. Uncertainty about the magnitude of changes reflected the large number of political, economic and social factors that influence decision-making on issues such as climate change, energy, water and waste management.

Climate policy scenarios addressed factors related to carbon prices, peak and sustained energy prices, water availability and prices, waste management regulations and costs, and compliance costs.

Discussion framework

We developed an initial structure for the discussion in the context workshop, based on the material summarised in the briefing note. We revised the structure during this context workshop to develop a structure and agenda for the assessment workshop that followed.

The main headings in the revised structure are summarised in Figure 3.

• The headings shown here were used to set the agenda and timetable for the workshop
• There was a large amount of detail, not shown here, that expanded on each topic and provided a data source and prompts to encourage and inform detailed discussion throughout the assessment workshop.

Outcomes

During the workshop it became apparent that many potential climate-related risks had been addressed already, at least to some extent, by separate business processes such as enterprise risk management, and business continuity and disruption planning. It was agreed that the assessment workshop would focus on reviewing what further work and information was required. If any risks were exposed that had not been addressed to date, action would be taken to fill those gaps.

Sources of uncertainty

Briefing material

The structure of Figure 3, expanded to the next level of detail and with relevant supporting documents, formed the basis for summarising the context discussion and generating briefing material for the assessment workshop.

Workshop structure and conduct

During the workshop each topic in Figure 3 was examined and discussed to determine:

• What factors were at work that might interact with climate change or climate change policy
• Where in current business operations, informed by risk management activity or disruption plans, controls already existed that were relevant to these factors
• What additional information was required or would be useful to the business to contribute to risk management for climate change or related purposes
• What actions were required to fill any observed gaps
• Whether any risks were important enough to be analysed now.

Discussion covered short-, medium- and long-term aspects of climate uncertainty. Areas of the business that were either felt to be clearly free of material climate-related risk, so that going through the form of an analysis would have been an empty exercise, or to have been encompassed in another part of the analysis, were only discussed briefly. For those topics that were examined in detail, aspects of the discussion that were important for strategic and business planning were captured in a template like Table 3.

Outcomes

The direct effects of climate change on the company’s business appeared to be minor in the short to medium term. They were largely confined to modest increases in the costs of some biological inputs, energy and water, resulting from climate change either increasing producer costs or placing pressure on traditional sources of supply.

Significant regulatory constraints on greenhouse gas emissions did not apply to the company at the time, although they could be applied in the medium term with subsequent reductions of emission thresholds. Indirect effects of other related policy changes were likely to result in modest increases in the costs of energy in the short term. In addition, social pressures and increasingly stringent waste disposal regulations could impose additional costs on the business and could potentially harm the company’s reputation.

While it was not felt they presented significant risks in the next few years, a few areas were identified where further examination would be prudent. These included:

• The potential magnitude of input cost increases or restrictions on water and solid waste disposal
• The cost of consumables for collecting biological inputs
• The potential impacts of climate change on the habitat and availability of specific biological input products
• Opportunities to exploit off-peak power and alternative power sources
• Assurance that regulations would treat joint venture operators as separate entities for reporting and emissions control.

Subject to the actions noted in the workshop outputs, the aggregate adverse effect of the risks identified appeared unlikely to be classified as material for the company. However, there were many areas for improvement, and some clear opportunities to be exploited.

Lessons

Risks identified already

The company had a well-established risk management framework and processes. During the context workshop is became apparent that many climate-related risks had been considered previously and incorporated into the company’s plans and processes, and they were well-understood by the workshop participants. In these circumstances, it was important to focus on what else needed to be included.

If risks have been identified already, and they are being addressed, there is no need to disrupt existing processes. Don’t duplicate effort, and don’t waste the time of senior people by re-visiting an existing risk assessment, unless clear improvements are possible. It is far better to concentrate on sources of uncertainty that might pose new risks to the company's objectives and business outcomes.

If things aren’t broken, they don’t need fixing!

Risk analysis and evaluation

The participants were all very familiar with the company's ERM framework, processes and tools. We did not attempt to analyse consequences and likelihoods using formal measurement scales. Instead, we allowed these senior managers to use their (informed) judgement about which newly identified risks might be important and worthy of follow-up.

Formal risk analysis is not necessary if there is sufficient structured information available for senior executives to make an informed decision. In this case most outcomes were clear, and more detailed analysis was only contemplated for a few areas where there was significant uncertainty and additional supporting information was required.

Don't bother with formal risk analysis if there is little benefit to be gained from it, or if there is insufficient information. After all, the purpose of risk analysis is to help senior managers to make better decisions – if they can do that easily, then don't impose additional requirements.

Be careful though. This was an acceptable short-cut in this instance, as the workshop participants were all very familiar with the company’s risk management processes and how they worked. In other circumstances this approach would not be recommended.

Climate change aspects

The company's ERM processes were well-developed, but they had a primary focus on short-term matters. However, most of the changes in climate and associated policy responses were expected to have medium- and long-term implications.

We needed a workshop structure that would encourage medium- and long-term thinking, and discussion about how the business and the risks it faced might evolve over an extended period. We used a diagram like Figure 4 to show the periods of interest and illustrate how risks might change. (Note that this is an example only. The company did not use matrices in this form.)

An examination of the scales for measuring consequences and likelihoods in the company's ERM framework indicated they were not ideal for analysing medium- and long-term climate-related risks; they had not been designed with this application in mind. The senior managers responsible for the company's ERM processes recognised they needed to review, and probably revise, the existing framework.

An ERM framework should be fit-for-purpose. Do not be afraid to revise it if new circumstances arise. For example, should more significant issues arise in future, perhaps as the business or the policy contexts change, the mechanism by which risks’ priorities are determined may need to be extended to cope with the strategic and long-term character of climate change.

Because formal risk analysis was not undertaken here, the limitations of the scales did not matter. However, formal periodic reviews of the framework and its application should be a component of the framework itself, and those with ERM responsibilities in the company noted the need for a review of the risk analysis scales early in the next strategic planning cycle.

Flexibility

The plan for the work described here included two workshops, but the details for the second workshop were quite different from those envisaged initially.

As noted above:

• Many risks had been identified already, so the focus of the second workshop was on new risks, particularly those with medium- and long-term implications
• To support the company's strategy development process, it was more important to discuss, explore and understand the sources of climate-related uncertainty and their implications than to spend time on formal risk analysis, particularly as the scales were not ideal for this anyway.

Be prepared to adjust your plans and processes if that will generate better information to support important decisions. The purpose of risk management is not to measure risks and generate risk registers, but to help executives make better decisions that will lead to better outcomes for the organisation.

Comprehensive approaches generate confidence

The work described here took a comprehensive, whole-of-company approach, in comparison to earlier work that had been based largely on individual sites and manufacturing units. The approach adopted here allowed the excellent work done previously in business unit silos to be consolidated in high-level whole-of-business workshops.

One of the most valuable outcomes of this company-wide approach was confirmation that the company was performing well in its approach to climate-related risks. This provided additional confidence for senior managers that their strategic approach was appropriate, supported by evidence that could be presented to shareholders, regulators and other stakeholders.

References

AGO (2006), Climate Change Impacts and Risk Management – A Guide for Business and Government. Australian Greenhouse Office, Canberra.

ISO 31000, Risk management – Guidelines. International Organization for Standardization, Geneva.