A Global Village
Issue 5 » Uncertainty & Risk

Risk & Uncertainty in Climate Change & Business Innovation

Anna Plodowski, Imperial College Business School

It has become commonplace in political and economic discourse to talk about climate change in terms of risk. Policy and business responses often express clear targets, for example in reducing emissions. This assumes that reaching such an emissions target will mitigate certain environmental effects and avert runaway climate change. It also implies that the business response can only be enacted if it is focused around quantifiable risks.

However, this article argues for a new paradigm – that climate change needs to be understood in terms of uncertainty as well as risk, and that doing so will draw in new players and enhance business opportunities and innovation.

Risk is an estimation of how likely a future event is to occur that is based on understanding past events and applying that understanding to the future. Uncertainty is different. It relates to a more fundamental state of not being able to know some things in advance, even if they are important. When policy makers and business leaders talk about climate change in terms of risk this reflects assumptions that we already keep track of all the important causal factors of climate change and the ways these factors interact. Hence, this assumes we are capable of predicting future climate change and its effects. However, our scientific understanding is not so clear cut.

Climate Change, Science and Uncertainty
The Royal Society (2010) report Climate Change: A Summary of the Science1 showed that while some aspects of climate change are widely agreed upon by scientists, others are subject to continuing discussion and yet more are ‘not well understood’ or fundamentally uncertain. Based on the scientific evidence to date, it would appear that we need to be able to respond to climate change both in terms of risks that we know or can estimate, and uncertainty that we don’t know and can’t estimate.

Some aspects of climate
change are widely agreed
upon by scientists,
others are subject to
continuing discussion
and yet more are
‘not well understood’

It can be argued that scientific research functions to reduce our uncertainty, by discovering laws about phenomena or at least estimations of quantifiable risks. However, scientific research cannot always function to reduce uncertainty. For example, the lack of data in some past phenomena can be a major shortcoming of any scientific model. The fact that crucial data from the distant past may be missing means that we will never be able to modify our understanding to incorporate these potentially important phenomena. Even if we have complete knowledge of the past, we cannot readily model evolution of complex systems in which feedback effects and significant interactions between components do not have clear mechanistic or easily predictable relationships.

In climate science there are huge challenges, both conceptual and computational, in developing sufficiently complex predictive models that include interactions between all the factors we know to be relevant. A recent presentation at the 3rd Conference on Global Warming in Lisbon earlier this summer by David Wasdell2 illustrated this challenge – some commonly used climate models do not include carbon cycle feedbacks or albedo effects. It is worth noting that David Wasdell’s presentation strongly suggests that the severity of the likely impacts increases as more feedbacks and interactive processes are added to the models, whilst the onset of these effects becomes earlier.

A more practical source of uncertainty lies in the fact that the rate at which our understanding advances may be slower than the rate of change of the climate. For instance, uncertainty continues to surround the rate of decay of summer Arctic sea ice3. Some predictions indicate that Arctic summer ice will be gone by 2016 suggesting that action is needed now4. This highlights the need for an acknowledgment that a lack of certainty should not preclude action.

Successful international new
ventures oscillate between
planned activities in
identifying new markets
and improvised activities
once operating in those
markets

The above indicates that we need to understand the climate system and our responses to it in terms of risk and uncertainty. A similar situation exists with regard to business innovation.

Business Innovation
Research into business innovation indicates that success requires the ability to exploit both risk and uncertainty. Focusing on one at the expense of the other may result in failure.

For instance, researchers5 observed the activities of small firms operating under severe resource constraints, exploring the impact of bricolage, the ability to re-combine existing resources in novel ways to meet new needs. One can interpret bricolage as the ability to exploit uncertainty, since many of the firms were keeping a stock of resources on the basis that they ‘might come in handy some time’. In other words, there was no specific plan for which the resources were being kept. Rather, they were used when a new opportunity arose in which they were recognised as beneficial.

If bricolage is a means of responding to new and unexpected opportunities, one might expect that higher levels of bricolage will lead to higher chances of sucess. However, the relationship between exploitation of uncertainty and firm growth is more subtle. Those firms that engaged in parallel bricolage, with multiple on-going projects relying on bricolage, did not grow. By enacting bricolage in all domains of their activity, they failed to develop standardised organisational routines or structures and were unable to exploit opportunities that were likely to be repeated. In other words, they limited themselves to acting only in uncertain environments, rather than also being able to exploit risky environments.

In contrast, the firms that grew engaged in selective bricolage, where the novel combination of resources in response to new demands was focused only on a particular project or part thereof, with the remainder of the activities being non-improvisatory (i.e. responding to known risks or certainties). This indicates that the exploitation of both uncertainty and risk is needed for firm growth.

Since business innovation
already necessarily involves
successful responding to
uncertainty, including
climate uncertainty may
make climate change a
more familiar challenge
for business

In a similar vein, others found that new ventures that entered new foreign markets successfully were able to improvise in their activities in that new market, and were more able to walk away from failure. In other words, they were able to recognise the uncertainty in their new context which inevitably had many features about which they could not know beforehand. However, they were able to do this only if they had also formulated criteria for deciding which new market to enter (i.e. an estimation of risks). Firms that did not do this but entered new foreign markets opportunistically (responding to uncertainty) were less able to improvise their activities subsequently, and interpreted the failure of their activities in the new market as the result of external factors. This suggests that establishing some of the possible risks in one’s environment helps one to improvise effective responses to uncertainty under both success and failure. Indeed, it was argued6 that this research indicates that successful international new ventures oscillate between planned activities in identifying new markets and improvised activities once operating in those markets.

The examples indicate how business innovation requires the exploitation of both risk and uncertainty.

Why Add Uncertainty?
However, from a policy and business perspective, the climate challenge already appears to be framed in terms of risk. Indeed, a common complaint from the clean-tech sector is that the clear and unambiguous policy measures needed are currently lacking, consistent with the view that minimising risk will enable effective action. How then might emphasising uncertainty in our understanding of climate change assist business innovation?

Including climate uncertainty may make climate change a more familiar challenge for business that already has routinely to deal with the uncertainties posed by competitors, customers or new technology. As such, emphasising the unpredictability of climate change is likely to add momentum to the development of more responsive structures, processes and routines, which may also benefit non-climate-specific domains of activity.

Secondly, framing climate change in terms of uncertainty in which there will inevitably be some highly surprising winners is likely to activate a more diverse range of actors from whom more innovative responses can develop.

Understanding climate change and the business response both in terms of risk and uncertainty should be the new paradigm. So here’s to action in our exciting, risky and uncertain present!

Anna Plodowski is a former cognitive neuroscientist with an interest in extremes of human behaviour and evolutionary psychological perspectives. She is currently doing a second PhD in the Innovation & Entrepreneurship Group at Imperial College Business School, on the topic of consumer energy behaviour and smart meter design.

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[1] Royal Society (2010) Climate Change: A Summary of the Science
[2] Wasdell D. (2011) 3rd conference on Global Warming Lisbon 2011: Climate Sensitivity: Amplification of the Anthropogenic Disturbance of the Climate System.
[3] Tietsche S., Notz D., Jungclaus J. H. & Marotzke J. (2011) Recovery Mechanisms of Arctic Summer Sea Ice. Geophysical Research Letters. 38: 4.
[4] Maslowski W. (2011) European Geosciences Union. General Assembly.
[5] Baker T. & Nelson R. E. (2005) Creating Something From Nothing: Resource Construction through Entrepreneurial Bricolage. Administrative Science Quarterly. 50: 329-66.
[6] Bingham C. B. (2009) Oscillating Improvisation: How Entrepreneurial Firms Create Success in Foreign Market Entries Over Time. Strategic Entrepreneurship Journal. 3: 321-45.