Harvard University

Written by Zeng Han-Jun

The extreme heavy raining season during this summer, has affected many places around the world. More than 900 people have died in Pakistan from severe rains and flooding this summer, as the country sees its eighth cycle of monsoon rains. In New Zealand’s northern and central regions after four days of downpours, forced hundreds of people from their homes. In New Mexico’s Carlsbad Caverns National Park, around 200 people had to be evacuated after being trapped for several hours by rising waters.

These are just some examples of what has happened during this summer and there are actually many more cases like these around the world. As climate change persists, we are going to witness more frequent cycles of hot and cold weather patterns therefore, giving rise to even more extreme weather conditions.

As such, consideration and inclusion of ESG and Sustainability principals into business operations should logically be a growing concern. Businesses that do not understand how climate risks will impact their operations, are at severe disadvantage. There is no point in arguing whether climate change is caused by humans or is a natural phenomenon. The fact is that the entire global environmental condition is changing faster than ever. Sunk costs into operational infrastructures are most likely built based on past climatic conditions and may not be future-ready. While analysts can look to the past for references, it is definitely not indicative of future changes.

ESG and sustainability principals and risks go far beyond the determination of Scope 1, 2 and 3 carbon emissions. It is not just about paying a consultant to settle the paperwork after the scholars and regulators have decided on the materiality, double-counting issues and other intricate details in ESG frameworks and certifications. Like I said, it goes far beyond that, and may even reach deep into business reserves. Let me share more using an example.

The salt production sector has been badly hit by the intense raining and floodings. Take note that this sector accounted for 270 million metric tons of salt in 2020, and the global market for salt manufacturing was valued at more than USD$28 billion that year. It is a very important industry because its production serves as feeder to many important sectors such as the chemicals, animal feeds, food and beverages and many others. Even items like butter, cheese and dairy dips depend on salt for taste and texture, and you will be mildly surprised by the lack of salt in common food like this.

During this rainy summer season, several producers’ salt piles were washed away by the floodings, and this has cause substantial losses to these companies, and in some cases, significant damages to the entire country. This is especially so for places that rely heavily on food exports that are made partly with salt. You will be surprised at how easy such risks could have been mitigated long ago by cost-effective and practical engineering solutions. Yet the business owners remained nonchalant despite the growing awareness and understanding of how climate change is turning out.

We are about to exit summer; these businesses are now in a hurry to account for their losses and most likely will pass on these losses to the rest of the value-chain, affecting the prices of many end-products and, eventually, pass the repricing on to the consumers.  The business and operational teams of many salt production companies are scrambling to replenish stocks so that they could fulfil the upcoming orders. There is a high chance that some customers will turn to salt replacements once the acute shortages of salt hit the market later.

ESG and Sustainability risks are very real, and it is going to affect many industries. Some risks are unpredictable so we cannot do much about it. But business owners should once again review, assess and plan ahead for the obvious risks that we can see right now.

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