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Risk management: lean, mean and green

Everyone is currently focused on the financial crisis, but that does not mean that other issues have gone away. When the markets settle down, the issue of climate change will still be there at the top of the agenda.

The arguments are familiar to most people – man-made emissions of CO2 and other greenhouse gases are warming the atmosphere and causing changes to the climate. The emissions, if left to continue at current rates, will have enormous consequences on everything from rainfall patterns and crop yields to the spread of diseases.

Crucially, from a risk management perspective, the seminal report by Lord Nicholas Stern, former chief economist of the World Bank, highlighted the fact that it will be far cheaper to tackle the problem now than to deal with it later. Nonetheless it will still cost 1% of global output.

This is an issue for family businesses on a number of levels. Firstly, the effects of climate change will affect many businesses, although the impacts will differ depending on the type of business you are involved in. Companies situated in flood plains are already seeing their insurance premiums go up – as are individuals with properties in vulnerable locations such as the Caribbean, where there has been an increase in the number of hurricanes and in their severity.

Any business that uses a lot of energy has already seen massive price rises and although these have fallen back recently, the long-term drivers suggest that a high price for oil and gas will be the norm in future. Water is another resource that companies will find increasingly scarce and expensive, while an enterprise with any kind of international supply chain will see the cost of transport increasing and increasing risks of disruption to their supplies or sales of their products.

As the scientific evidence behind climate change has become more certain and the consequences have become more obvious, regulation dealing with climate change has proliferated and companies should be aware of the risks this presents.

The European Emissions Trading Scheme (ETS), for example, allocates energy-intensive installations a certain number of emissions allowances, which declines every year. If they exceed the allowance, they have to buy emissions credits on the open market – either from companies that have a surplus or from carbon-reducing projects in the developing world.

While Europe's ETS was the first, others are planned in Australia, New Zealand, Japan and the US. These schemes are aimed at the very biggest polluters – such as power stations, steelworks and cement plants – but once these are covered, focus will inevitably turn to those with smaller emissions.

In the UK, a new climate change bill currently going through Parliament – the world's first climate change legislation – will introduce the Carbon Reduction Commitment. From 2010, businesses such as hotel chains, retailers, banks and house builders – any organisation with an electricity bill of more than about $800,000 – will be subject to a new cap and trade scheme.

All of this is relevant not just to those who run such businesses but to their investors and trading partners as well. If companies fail to deal with issues related to climate change – either by preparing for the implications or, better still, by positioning themselves to provide solutions – there is a real risk that shareholder returns will suffer and they will find it harder to work with other businesses who require that your company is behaving in a climate friendly way.

"You have to think 'is my business climate-proofed?'" says Emma Howard Boyd, head of SRI and governance at Jupiter Asset Management. "Is our family business involved in something where the legislative framework might change dramatically?"

A growing number of family businesses have taken measures to mitigate these risks. One of the most high-profile is Wal-Mart, the US supermarket chain owned by the Walton family, which has already started measuring the amount of energy used to manufacture and distribute certain products and encouraging its suppliers to cut their energy use.

It is also fitting solar panels on the roofs of its supply depots, improving the fuel efficiency of its truck fleet and exploring how to generate electricity from the waste produced by its stores.

Consequently, one of the best ways to manage the risks presented by climate change is to turn the potential threats into opportunities. Lord Stern estimated that the market for low-carbon technologies, for example, could be worth $500 billion by 2050.

The recognition of the need for more renewable energy, in conjunction with growing concerns about energy security, have led to the creation of subsidy regimes encouraging renewable energies such as wind and solar power, energy efficiency and sustainable transport projects.

Many families already recognise the opportunities that are on offer. Marcel Brenninkmeijer, a member of the family behind the C&A retail chain, chairs Good Energies, which has backed companies such as solar group Q-Cells, while Swiss bankers such as Olivier Pictet of the Swiss banking firm and Thierry Lombard at Lombard Odier Darier Hensch are heavily involved in channeling funds towards environmental projects.

The Rockefeller family made the news recently when they demanded that Exxon Mobil, the oil company their family founded, take more account of climate change. Texas oil tycoon T Boone Pickens has unveiled ambitious plans for a huge wind project in the state, while the Anschutz family is planning a $3 billion, 3,000mw transmission project along with a 2,000mw wind farm, much of it on a ranch the family owns in Wyoming.

There is a range of incentives aimed at reducing costs for those who want to get involved in such projects. For example, a little-noticed aspect of the US government's recent $700 billion bail-out plan was that it extended tax incentives for wind power by one year and for solar power by eight years, ensuring the economics of projects in the US remain attractive for the foreseeable future.

However, focusing just on the high profile areas such as wind turbines will restrict your opportunities, says Howard Boyd. "It is important to look as broadly as possible across green solutions. People often focus on clean technology but there are also opportunities in areas such as waste, public transport, energy efficiency and fuel efficiency."

The credit crunch may provide some good opportunities for family investors, too. New figures from industry analysts reveal that investment in clean technology from the public markets has ground to a halt as a result of the drying up of liquidity, meaning that private investors able to take a longer term view could snap up some bargains.

Many investors' interest in the field starts from a philanthropic point of view, says Maya Prabhu of private bank Coutts. "Clients are concerned and interested in climate change, how it affects global livelihoods, health and other issues. But there is so much activity i, much of it contradictory, that it can be difficult to know where to start."

Yet, it seems that despite all the doom and gloom regarding the world's financial markets, the best way for families to manage the risk associated with climate change is to get on the front foot and make a positive difference to the future of the planet.

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