A variety of climate risks are starting to have a noticeable impact on how we do business. These risks can be physical climate risk, both chronic and acute, which directly impact operations; financial risks, such as divestment; regulatory/policy risks, such as carbon pricing or risk disclosure requirements; and reputational risks. In the next series of blog posts we are going to take a deeper look at each of these risks. The first will be with regulatory risk.
According to the Global Adaptation and Resilience Investment (GARI) Working Group 2016 survey, 78% of respondents see physical climate risk as being a very important concern and 53% ranked climate regulation risk as a very important issue that must be considered. Within the same survey, 68% of respondents are currently working on strategies to deal with anticipated changes in climate-related regulations.
Organizations Addressing Climate Change
Organizations must we willing to address the transitional risks associated with new policies and regulations that are likely to be adopted to mitigate climate change. New climate related regulations at the local, state and federal level have been and will continue to be considered. Some of the potential regulatory risks are related to pricing or taxing carbon emissions; change in land use zoning and subsequent loss of property value; new building and construction standards; new business continuity or insurance requirements; more requirements attached to state and federal funding for infrastructure development; and more stringent disclosure requirements.
To add complexity to these regulatory changes, there is a distinct possibility that a lot of this action will be happening at the state and local level which will result in a patchwork of regulations and policy across the United States. For example, many state and local governments have vowed to move forward in battling climate change. California is one of the more vocal and active states in regard to climate policy; see the “Preserve California” legislative package.
A key area of interest for me is to what extent these companies are actually acting on these potential regulatory risks. The private sector gets very uncomfortable when there is uncertainty in the regulatory environment. In fact, although regulations are typically not highly desired, many corporations prefer regulatory certainty over a regulatory environment that is in flux. Organizations can at least plan when there is a greater certainty. This is why we see some large corporations that have not traditionally been overly excited about climate regulation pushing for a carbon tax. A carbon tax is not too complex and it can be planned for and actively managed by corporations.
Uncertainty in Regulations
Unfortunately, the current Administration is creating a significant amount of uncertainty in the regulatory space. There is a definite desire by the current administration to roll back as many climate-related regulations as possible. It appears the Clean Power Plan has largely been put on the back burner and there are a variety of efforts to roll back methane emissions and other Obama-era regulations. However, today July 29th, the US Court of Appeals for the DC Circuit just ruled that the EPA cannot suspend these rules. This follows an earlier loss by the Administration when the Senate voted to reject the suspension of these rules.
This frenetic policy-making process of the current administration to roll back regulations just because the word climate is associated is not good policymaking. This is particularly a problem when the Administration does not understand the policies they are rolling back and how policymaking works, particularly in regards to the dynamic we have in place with the checks and balances from the Courts and the representatives we have on the Hill. Further, for an Administration that is focused on economic growth, this yo-yo-ing back and forth between rules and regulations is not good for business. It leads to a very uncertain business environment that reduces investment R&D, and economic growth. To track policy uncertainty, Moody’s has published their Policy Uncertainty Index and currently, it is at its highest point to date this year.
I am a fan of many of these climate regulations. I would like to see many of them stay in place. That being said, none of them are perfect and there is room for improvement. However, a wholesale rollback without any thought as to the impact on the environment, and particularly here, the impact it has on the ability to conduct business is highly problematic. There are common areas of concern and interest that both sides of the aisle can work on together. We have great examples of bipartisan work from Shaheen and Portman and Murkowski and Cantwell. So if we really want to make “America Great Again” it is important that the current Administration take a deep breath on their regulatory agenda, learn how the federal policy making process works and conduct policy making in a way that actually helps business and our communities.