In focus

On thin ice: the danger posed by thawing permafrost and how businesses need to prepare

Rapidly thawing Arctic permafrost is a prime example of how climate change is impacting natural ecosystems and, in turn, business operations.

Permafrost is the name for ground that remains frozen for more than two years. It has existed in this region for millennia.

Temperatures in Russia have increased by around two and a half times the global average since 1970, according to the Federal Service for Hydrometeorology and Environmental Monitoring.

Another 1.9–3.4°С temperature rise has been predicted by the middle of the century – and the increase could be even more dramatic in critical winter months, a paper published in Russian Meteorology and Hydrology suggests.

What dangers does thawing permafrost pose?

Permafrost covers about a quarter of the northern hemisphere and its thawing leads to a multitude of environmental issues. Chief among these is the release of gases such as carbon dioxide and methane, which contribute to climate change and accelerate global warming.

It’s estimated that there’s more than twice as much carbon stored in the earth’s permafrost than there is in the atmosphere – up to 1,600 billion tonnes.

Thawing permafrost represents a significant physical climate risk to companies operating in permafrost areas. For example, as soils shift, infrastructure is threatened and floods become more likely.

Last year a sizeable fuel tank leakage occurred in the industrial city of Norilsk in Krai, Russia, just above the Arctic Circle. It increased fears over the impact of global warming – and specifically thawing permafrost – on infrastructure.

Although a subsequent investigation did not identify permafrost thawing as a reason for the incident, we continue to view it as a significant infrastructure risk to Russian firms.

We believe it should be at the forefront of risk considerations and capital allocation decisions of major Russian companies in the energy and materials sectors in particular.

How can this climate change risk be quantified?

Schroders is committed to modelling investment risks from physical climate change.

We are aiming to deduce future permafrost risk in Siberia in a collaborative effort between Schroders’ data insights unit, the sustainable investment team and our emerging markets equities team.

This involves studying the surface temperatures in the locations where the main companies operate and identifying which are operating in at-risk areas.

Schroders’ data insights unit created a permafrost dashboard so we can analyse weather and geographic trends in oil and gas production across Russia. It allows us to track rates of permafrost thawing in different locations.

How has Schroders engaged with companies at risk?

In December 2020, Schroders’ global emerging market equities and sustainable investment teams engaged with six companies identified as operating in at-risk areas in Russia.

We sent a list of questions alongside a tailored letter outlining our understanding of the permafrost risk relevant to each company’s operations and how climate change is exacerbating the problem.

This included which of a company's locations are most at risk from climate change disruption through permafrost destabilisation.

The answers will enable us to understand how each company views physical climate risk from permafrost.

What next? Schroders' aim to influence permafrost management

The aim is to collate feedback and rank the firms based on our analysis.

The information gathered from company responses will not only allow us to better assess companies’ management of these risks, but also to further develop our proprietary tool and monitor how these risks evolve in the coming years.

Where companies are not sufficiently managing current risks, or are not sufficiently prepared for future risks, we will engage further to influence them towards more sustainable business practices.

Ultimately we want to influence companies where the current permafrost assessment and management is not sufficient.