Rethinking Business When the World Is on Fire: Planning for a New Normal That Isn’t

Over the past several weeks, the world has been overwhelmed with news coverage about unprecedented fires, storms, and global disruptions. While Canada is having its worst-ever summer for fires, Phoenix, Arizona, has set a record for 31 straight days of temperatures of 110 degrees Fahrenheit (43 degrees Celsius) or higher. At the same time, record fires and temperatures have affected Spain, Italy, and Greece, the latter of which has also faced record-setting fires. Droughts have not only affected Spain and Italy but have also set records in the Western United States. India has become significantly more drought-prone, with drought areas increasing by over 57 percent since 1997.

But nowhere has more clearly demonstrated the need to address the risks of climate change than the fire that destroyed the historic city of Lahaina, Hawaii. The worst fire in the United States in over a century has left over 110 people dead, and as of August 25, nearly 400 still missing. When combined with the dramatic rise of ocean temperatures that include record-setting temperatures off Florida, disappearing polar ice, and the first tropical storm to reach California in 30 years, the picture facing governments, the public, and the private sector is unprecedented and does not appear to be stabilizing any time soon.

In the late 1990s, I taught a college course on physical geography and how it affected the world’s population. At the time, one of the major points of discussion was the trend of global warming. I discussed how much of Europe and early America developed at the tail end of the Little Ice Age, which ran from the mid-1300s to the mid-1800s, and how the world’s climate was naturally cycling to a warmer period, even without the effect of human activity. The course pointed out that the significance of human activity was to greatly accelerate the warming trend faster than both nature and society can handle. One of the most significant issues I raised is that the real threat, in many ways, comes from the rapid warming knocking a system out of balance even more than the warming itself. My analogy was to describe how rocks being thrown into a pool might take a while to raise the pool’s level, but the waves created by the rocks could be seen and felt immediately.

Regardless of how one feels about the actual causes of global warming, failing to act and invest in mitigation measures for businesses and governments is now leading to massive economic and social costs in the present. For businesses looking to invest in real estate, food, tourism, transportation, and even technology, recognizing the real threats of an unstable system is essential to understanding what challenges will be faced not just 10 years down the road but increasingly in the present. A great deal of attention has been paid to the increasing number of fires and storms but not nearly as much to the underly investment in infrastructure that helps not only to implement investments in renewable energy and new technology hubs but also to mitigate disasters that are occurring with greater frequency. Some key factors to look for include:

The state of the energy infrastructure: This has become the most significant challenge for businesses in virtually all locations, both in the developed and developing world. A tremendous amount of attention was paid in the 2010s to the importance of energy security and accessibility, with new investments in fracking in the US, coal and renewables in China, and new pipelines in Europe. But the main concern has become the electrical grid and the capacity to handle increasingly variable climate and demand cycles. Both the recent fires in Maui and the disastrous Camp Fire of 2018 in California are believed to have been caused by downed power lines. Underinvestment in the electricity transmission infrastructure in California has left many communities vulnerable, causing issues as cycles of extreme weather create physical stresses. In addition, increasing numbers of alternate power sources (such as wind and solar, combined with electric vehicles) push the limits of the grid to redistribute power.

While California has been at the cutting edge of this, the fires in Hawaii and numerous other locations worldwide show the danger of electrical lines built for weather patterns of a few decades ago. At the same time, the 2021 Texas power grid failure demonstrated that lack of effective investment can lead to dangers for businesses when unusual cold strikes an unprepared system. As manufacturing with high power demands are increasingly lured to lower cost locations not only in the US and Europe but also to countries with less developed power systems such as India, Vietnam, Mexico, Kenya, and elsewhere, it is paramount to be aware of the investment in energy sources and generation, as well as the resilience of the grids and transmission lines themselves.

Water supplies: Another key concern for businesses, not only in agriculture but also in many areas of manufacturing, advanced technologies, and especially for real estate, is the issue of water availability. Several of the cities that are essential to the global economy are already facing significant stress due to the combination of growing populations, climate change, and inadequate investments in key infrastructure elements such as water storage, efficient distribution systems with limited leakage, and water recycling. The list of global cities under the most stress varies but has included prominent locations such as Sao Paolo, Bengaluru, Beijing, Mexico City, and even London. London is a noteworthy example, as decades of underinvestment in its water infrastructure have left the city vulnerable.

One notable example of technology and manufacturing requiring awareness of water issues is the recently announced Tesla plant in Monterrey, Mexico, where water conservation measures were fundamental to the plant’s approval. For agriculture and development, ongoing disputes over water are increasingly common, whether over the Nile River, Colorado River, or even the Tigris and Euphrates rivers. Debates are increasingly common as pressures mount on water sources, development restrictions, and water use. Even before the recent fire, Maui was already facing significant pressure on water allocation among tourism, agriculture, and residents.

Disaster exposure and resilience: Threats to global infrastructure, supply chains, and related issues came to the fore during the COVID-19 pandemic. But numerous other incidents have demonstrated real threats to everything from tourism to electronics components to food and pharmaceuticals. Disasters are often unpredictable, such as the 2011 Tohoku earthquake in Japan. Still, the damage from the event, including to the Fukushima nuclear plant, demonstrated both the strengths and limitations of disaster resilience, even from a country as well prepared as Japan. Flooding in Thailand the same year profoundly impacted world hard-drive supplies, affecting numerous computer and technology-related products and raising issues that would again be repeated with semiconductors during the pandemic.

Tourism is also increasingly at risk, not only from rising sea levels and more brutal storms but also, as recently demonstrated, from fires that strike at developments and resorts in what are becoming more vulnerable areas. The rash of fires in Greece has raised specters of a tourism collapse that has not fully materialized yet. However, even fires not directly in locations can affect tourism, such as the 2019 Indonesia fires impacting Singapore or the recent Canadian fires affecting New York City. For more marginal locations, such as Paradise, California, in the 2018 Camp Fire, such risks destroyed the entire town. And increasingly, insurance companies are recognizing these dangers, with Farmers Insurance pulling out of Florida due to storm risks, and Allstate and State Farm halting new home insurance in California primarily due to fire risks.

Ultimately, there is no new normal as yet, especially when it comes to climate change. It is essential to not only assess the risks in a location but also work with local, regional, and national governments to invest in the appropriate infrastructure. Companies, economies, and people cannot thrive if they rely on assumptions about how things were a century—or even a decade—ago. Collaboration and effective understanding of risks are vital. We must realize and be willing to face inconveniences now and recognize that investing in smart physical capital is a key to resilience and growth. Companies must assess their own exposure, as well as those of their workers and customers, to safeguard against such risks in the future.