Risky business: Corporate constructions of climate change risk

As a growing number of studies have demonstrated, climate change poses a significant threat to future social and economic activities. Indeed, the language of ‘risk’ has become a perennial theme in discussions of future climate change impacts and a central construct for how businesses respond to and ‘manage’ climate change.

Recently Daniel Nyberg and I had an article accepted for publication in the journal Organization exploring how corporations have responded to climate uncertainties and threats as ‘risks’ (pre-print PDF here). Conventional cognitive-scientific depictions of risk see organisations as ontologically separate from the risk they act upon. The core assumption underlying risk management is that risk is ‘out there’ and it just has to be ‘found’ and ‘captured’ by professional experts using statistical tools and analysis.

By contrast, a social constructionist perspective on risk argues that the meaning of what a risk is, and how it should be dealt with, is dependent on pre-existing knowledge and discourses. Risk constructs are open to social definitions and contestation. This perspective on risk pays greater attention to how cultural and political frameworks, and powerful institutions, influence how we understand dangers and uncertainties as ‘risk’. While there are many dangers and hazards to deal with in society, only a few are constructed as ‘risks’.

In exploring how companies construct climate change as ‘risk’, we researched five case study organisations based in Australia including:

  • a leading energy producer which was supplementing fossil-fuel generation with renewable energy sources;
  • a large insurer that was measuring the financial risks of extreme weather events;
  • a major bank which was factoring in a ‘price on carbon’ in its lending to corporate clients;
  • a global manufacturer which was reinventing itself as a ‘green’ company producing more efficient industrial equipment and renewable energy technologies; and
  • a global media company that had embarked on a major eco-efficiency drive to become ‘carbon neutral’.

In this study we firstly identified different risk frames that these businesses used in seeking to make sense of climate change as an issue. These included what are commonly termed:

  • ‘physical risks’ (e.g. the potential for future extreme weather events such as storms, droughts and fires to impact upon business operations);
  • ‘regulatory risk’ (e.g. focused on the potential for government regulation of greenhouse gas (GHG) emissions to affect costs);
  • ‘market risks’ (e.g. the potential for new disruptive, ‘low-carbon’ technologies to challenge established business models) and
  • ‘reputational risks’ (e.g. the threat of negative customer or community perceptions of companies’ environmental impact).

The construction of risk in these companies involved a number of processes. By dividing climate change into these different risk frames, corporations played a central role in bringing particular realities into existence. For instance, the division of climate change into physical, regulatory and market/reputational risk broke up a complex and amorphous concept into smaller components that could then be made ‘real’ via corporate practices and policies. Beyond this however, risk frames then needed to be naturalized within market conventions through processes of reiterating climate change as ‘risk’, codified in monetary value, entangled in market conventions, and cemented through political activities.

Beyond the corporate construction and performance of climate change risk, our study also shows how these risk frames have political effects. Most importantly, these risk frames often failed to fully account for, or represent, the complexities of climate change. Indeed, the social and natural consequences of climate change often undermined the corporate risk models that sought to explain and predict these very same events.

So for example, while energy companies could promote their investment in coal seam gas extraction as a ‘cleaner’ form of fossil fuel in terms of eventual CO2 emissions (thereby reducing their regulatory risk in terms of carbon pricing), fugitive emissions from these activities of the far more powerful greenhouse gas methane (CH4) were notably downplayed. In insurance, the reliance on historical models of climate risk often failed to fully account for climate change complexities, such as new and extreme weather events and other unforeseeable realities. As one senior manager acknowledged:

I mean most people didn’t think it hailed in Melbourne until last year. There was another one in Perth, you know it was classic. It was known in the industry as “un-modelled risk”, which means there isn’t a detailed model of the risk that you can use to price it. Perth – hail in Perth was unknown. I mean completely unknown.

In addition, non-market actors were excluded from the risk codification and often later intervened in ways that wrong-footed corporate risk modelling. So critiques of corporate climate initiatives continued to surprise their creators most often in allegations of ‘greenwashing’ and hypocrisy. For instance, despite claims by financial institutions that they were reducing their own carbon emissions and encouraging corporate clients to adopt more climate friendly practices, NGOs criticised these companies as the major source of investment in new coal mines and other fossil-fuel based energy production.

Moreover, only certain positions are taken into account in framing risk. For example market and reputational risk frames exclude aspects of consumer identification that are not based on market conventions. So for instance, energy companies’ promotion of ‘cleaner’ coal-seam gas has resulted in vehement and on-going public relations battles with agricultural landholders and communities which objected to gas ‘fracking’ as environmentally harmful. Here, non-market conventions of community, aesthetics and the natural environment impinged on the risk calculus of lower carbon emissions and increasing commodity prices for ‘natural’ gas. Images on the nightly news of farmers and protestors locking themselves to bulldozers and angry protests outside company offices, provided vivid examples of such a misfire.

These misfires make room for alternative representations of climate change and different political interventions and experimentation. We can thus expect that the narrow corporate theories and models dominating current responses to climate change will fail to produce the predicted effects. The complexity of climate change will thus ensure continuous epistemological politics in terms of what we know, what we should do, and who should be responsible.

4 thoughts on “Risky business: Corporate constructions of climate change risk”

  1. Agree with the premise that risks of climate change are to be managed. What if, instead of framing risks as threats, we framed them as opportunities? I wonder if that shift in perspective would affect industry and insurance.

    1. Maia,

      Thanks for raising this point.

      Corporations do regularly frame climate change as both ‘risk’ and ‘opportunity’. Indeed, this is the dominant discourse of how businesses make sense of climate change given the need for a ‘business case’ and a market logic to make climate change (and most other issues) ‘real’. This is also the problem in relying upon business to ‘solve’ (or be a ‘leader’) in responding to climate change as businesses can only understand this issue from the perspective of a market order of worth. As we argue in the article this ignores (and often corrupts) other alternative orders of worth such as community, civic, aesthetic and environmental concerns if they conflict with the market motivation (profit, lower costs, increased efficiency). In terms of the practice of risk management, these exclusions of other views and actors result in the risk ‘misfires’ we discuss.

      Daniel and I have written more about this fundamental conflict between the market and the environment here:
      https://climatepeopleorg.wordpress.com/2014/02/15/why-business-leading-on-climate-change-is-a-problem/
      https://climatepeopleorg.files.wordpress.com/2013/02/bjs1301.pdf

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