The spectre of El Nino again looms. Forecasts suggest that this weather phenomenon, linked to ocean-surface temperature rises, will likely bring lower than average rainfall and droughts in Asia as soon as July. Extreme weather events such as these have time and again disrupted agricultural markets with either too much or too little rain. This has been particularly true for palm oil, cocoa, coffee and sugar.
Of course, extreme weather events are not new – as underscored by longstanding phenomena like El Nino – but their frequency appears to have increased over the past decade, pointing to the emergence of a new “normal”. We need look no further than the Philippines, the host of the forthcoming Summit of the World Economic Forum on East Asia. It will be years before the Philippines recovers from the devastation of Typhoon Haiyan, which left in its trail more than 5,500 deaths, 4 million refugees and over $15 billion in economic losses.
In the past, floods and droughts had a devastating but largely localized impact; today, crises often affect more than one country or region. While the globalization of production chains has brought systemic gains for the world economy, it has also exacerbated the speed and scope of contagion in the event of shocks.
Following the Thai floods, car makers and mobile-phone manufacturers across the world were forced to stop or slow production as inventories of essential products – electronic components, car parts and fine chemicals – were quickly run down. The potential of climate change (and other environmental changes) to disrupt global trade and production for many resources is only just becoming evident.
These events are harsh reminders of the vulnerability of the global production method. The just-in-time business model may have kept costs low and companies lean and nimble, but they do not leave room for unforeseen shocks. The same applies to cities. Major hubs for production, trade and travel are often badly affected by international shocks, irrespective of the source. This means that having multiple suppliers does not always directly translate into resilience or resource security.
In recent months, new findings of the Intergovernmental Panel on Climate Change, together with the US National Climate Assessment, have reminded the world afresh of the vulnerability of nations, even rich ones, against escalating environmental and climate risks. On the positive side, there is now better appreciation of the astronomical costs of these disruptions. The Thai floods of 2011 not only left 12 million people homeless and caused $45 billion in damages (amounting to some 2% of Thai GDP), it also wrecked six industrial estates and closed more than 3,000 small businesses, afflicting many other enterprises beyond the Thai borders.
Even though events like floods and hurricanes are known hazards, governments and businesses often remain woefully unprepared or under-prepared with respect to the risks of having multi-location production chains. While tremendous efforts have gone into improving scientific understanding as well as risk-management frameworks, time and again governments and businesses are proved inadequately prepared to respond to these crises and manage their economic, social, political and humanitarian consequences.
At the heart of the problem is that contingency planning – or a risk-management approach based on responsive measures – assumes that status quo ante will return post-crisis, and that things will go back to normal. This approach falls short in a world with complex risks, especially when dealing with a slow-motion crisis such as climate change.
The level of preparedness also remains low because risks that are assumed to be low in probability are often ignored, or because the high cost of risk mitigation deters early action. Even though many businesses have stepped forward to cushion the economy against shocks, beyond certain thresholds they rely on governments as the responders of last resort; it is politicians who are expected to take charge during major crises.
As business-as-usual is no longer an option, many stakeholders in Asia are rethinking their disaster-preparedness approach to ensure it emphasizes rapid response and post-crisis relief (e.g. through budget reallocations) as much as preventive measures, including incentives for resilient green infrastructure. The integrated nature of East Asia’s production system also means that regional cooperation presents tremendous opportunities for collective risk reduction. Global businesses, especially those active in Asia, are beginning to ask if they can help drive and deliver new financing and risk-transfer mechanisms to support public and private investment into more resilient, climate-friendly assets and infrastructure.
Investing in preparedness clearly pays. The United Nations points out that every dollar spent on disaster risk reduction saves $7 in emergency response. As it currently stands, however, every dollar spent on prevention and preparedness is outmatched by the $9 spent in responses, according to the Global Facility for Disaster Reduction and Recovery and the World Bank.
For businesses, the ability to manage these climate-induced resource risks will be increasingly decisive in determining future competitiveness. It also raises questions about the just-in-time production model, which encourages low stock holdings by companies and other market participants in their drive for efficiency and flexibility. Will this model become increasingly redundant in a world with interlocking climate-resource risks? Will the need to increase buffers against short-term bottlenecks or volatile prices render it obsolete? What are the future business models that will help ease the transition?
For governments, stepping up regional cooperation (amongst coastal cities, for example) could also help increase the buffer zones and reduce risks. Ensuring that businesses – especially small and medium-size enterprises – are equipped with sufficient knowledge or capacity to invest in resilience is also important.
The Philippines has a unique opportunity to rise from its experience of extreme damage and lead the way in demonstrating new approaches to climate-resilient investment. The World Economic Forum’s regional summit in Manila is a timely opportunity to consolidate and deliver the new beginning.
Author: Bernice Lee, Director, Climate Change, World Economic Forum
Image: A farmer works on a drought-hit paddy field. REUTERS/Stringer/Files