As extreme weather events become more common, what should investors be on the look out for? Businesses that are doing “the big pivot.” This is what Andrew Winston describes in “Resilience in a Hotter World,” the lead article in April’s Harvard Business Review. The Big Pivot is a fundamentally new business strategy that not just considers climate change—it’s creating companies that can, in Winston’s words, “manage, and profit from, extreme volatility.”*
This is one of the most succinct and persuasive articles I’ve read on what businesses must do to succeed in a hotter world, and it comes from more than a decade of research and consulting Winston has done with the world’s largest companies, particularly how they deal with the resource scarcity that comes with climate change and consumption of nonrenewables. As Winston points out, the challenges are daunting: In 2012 Toyota posted a $1.5 billion earnings loss because its supply chain in Thailand was devastated by floods. After Hurricane Sandy, Con Edison had a $500 million loss and New York City overall $6 billion. The examples go on.
According to Winston, the most resilient companies are doing three things:
(1) They understand how resource scarcity will affect their ability to run their businesses, including throughout the supply chain. This means taking a long-term approach to profitability rather than the “short-termism” defining most of Wall Street today.
(2) The most resilient businesses make better investment decisions. This means placing a value on externalities and factoring them into where to allocate resources and how to incentivize employees. Externalities include pollution, access to clean air and water, political stability, and a stable climate—factors that are difficult to value and typically ignored in investment calculations.
(3) Resilient companies collaborate with the government, with other companies, and with their customers. For example, archrivals Coca-Cola and PepsiCo are part of a coalition with other companies and NGOs to find a less toxic way to keep food and beverages cold.
Savvy advisors will do their homework and find these resilient companies, or call on their SRI business partners to provide the information they need to present to clients. Advisors need to be “resilient” as well.
*“Resilience in a Hotter World,” Andrew Winston, Harvard Business Review, April 2014.