Tipping Points: Decision making under deep uncertainty
Climate decision-making requires acting on long-term scientific signals with imperfect estimates of financial and societal impact, sometimes well before markets fully price in the risks. Leaders make strategic choices under this uncertainty, which may only become visible to the broader market years later.
A common question I get from board members or executives: What do the next five years look like, for me, in my job? For context, across the S&P 500, the average CEO has a tenure of 7.6 years and average board of directors member has a tenure of 7.8 years. Investors can have longer tenure in their roles, but not much. iWhile those corporate leaders make decisions today that may affect the future of their business beyond their tenure, they will not necessarily navigate through an 8-year-plus future world in their current seat. They want to know how the climate will change and how it will flow through their daily work life. It requires translating climate science into direct impacts within their specific time horizon (<8 years). However, it also requires thinking how perceptions of the future may shift as more is known in climate science and markets price in both cumulative and future climate change. In essence, what they want to do is make sure they time the (climate) market.
There’s no question that climate change will have business impacts. Physical climate risk is beginning to affect insurance markets, utilities within wildfire zones, and real estate. But not all change may be gradual. Low-probability but potentially abrupt “climate tipping point” shifts could reshape risks and opportunities rapidly. These climate black swan risks may be unlikely but highly consequential, with considerable uncertainty about when or how quickly they could materialize. For these nonlinear changes, timelines of executive tenure and currently projected change are mismatched, which impedes effective long-term decision-making.
These climate tipping points have emerged as a phenomenon of concern but also deep uncertainty and scientific debate in recent years. We need to try to bridge this gap to truly prepare businesses for deeply consequential climate events that may occur against highly uncertain timelines. Nevertheless, elements of tipping point risk are beginning to be incorporated into certain decisions for capital allocation and investment strategy. This report dives into climate tipping points, what they are, who is pricing them in, and how to make decisions under deep uncertainty.
In short, while the Climate Intuition series recommends prioritizing resilience planning for physical risk and decarbonization, one should treat tipping points as potentially impactful but under-modeled. Just because an event is improbable does not mean it is impossible. The lack of historic analogs and abrupt, nonlinear and uncertain nature of tipping points makes them difficult to plan for against more routine volatility risks. Scenarios and tabletop exercises, borrowed from other spheres of decision-making under deep uncertainty, can help prepare for new science or emerging shifts.
The table below helps us think through different actors and their objectives that might lead to potential actions they can take on climate tipping points. Book suggestions have been added, which may seem counterintuitive to other reports we’ve published. At recent board meetings, people have asked where they can read more, fiction or nonfiction, to explore different future scenarios to understand how to plan for an uncertain future.
