08/09/2014
The Carbon Disclosure Project (CDP) states on its homepage that it “provides the only global system for companies and cities to measure, disclose, manage and share vital environmental information – holding the largest collection globally of primary climate change, water and forest risk commodities information.” In an age of climate change this is crucial information for companies and investors alike trying to assess the risk of ‘doing business’ around the world. In general, two risk categories need to be distinguished: first, risks based on historical data tend to occur with some degree of frequency and therefore can be expected and accounted for on balance sheets. Second, and more interesting, risks that are utterly unexpected and exhibit sudden unpredictable changes with negative impacts for ‘doing business’ in specific locations. In this respect, climate change-related risks appear to constitute a unique phenomenon because we know that physical impacts of climate change will affect assets and investments down the road. However, what is not or only partially understood is the potential severity as well as the timing of those impacts, and the ways climate change and extreme weather will impact, for example, agriculture and infrastructure, and thus companies’ bottom lines in those sectors. Risks as a result of climate change could also be macroeconomic in nature such as a reduction in overall productivity and economic growth. Robert Rubin, Co-Chairman of the Council on Foreign Relations and former Secretary of the US Treasury, made some noteworthy comments in an opinion piece in the Washington Post regarding climate change related risks: “Good economic decisions require good data. And to get good data, we must account for all relevant variables. But we’re not doing this when it comes to climate change – and that means we’re making decisions based on a flawed picture of future risks. While we can’t define future climate-change risks with precision, they should be included in economic policy, fiscal and business decisions because of their potential magnitude. (…) Climate change is a present danger.” This is an assessment that is shared by Tom Carnac, President of CDP in NorthAmerica, who remarked on the occasion of a CDP report release that “[d]ealing with climate change is now a cost of doing business [and making] investments in climate-change-related resilience planning both in their own operations and in the supply chain has become crucial for all corporations to manage this increasing risk.” This is one of the major findings in a CDP report based on CDP 2011-2013 S & P 500 companies’ disclosures – where major public companies describe climate-related risks and costs – in addition to such findings that companies assess “physical risks from climate change to be increasing in urgency, with physical disruptions and cost impacts already being felt. 45% of risks were described by companies as current or predicted to fall within the next 1-5 years in 2013, up from 26% in 2011. 50% of the risks disclosed were described as more likely than not to virtually certain in 2013, up from 34% in 2011. [And] 68% of the disclosed physical risks were direct to operations in 2013, up from 51% in 2011.” If nothing else these figures seem to prove that climate change-related risks are no mirage and, above all, present potentially severe economic ramifications for all stakeholders. The following table reveals, among other things, the top five physical risk drivers and the top five potential impacts of those physical risks: Aggregate Physical Risks Profile Disclosed by S&P 500 Companies over 3 Years Source: Carbon Disclosure Project (CDP) To follow are two exemplary and instructive energy company 2013 descriptions of risks and potential financial implications from the same CDP report: Hess Corporation (2013): “Aggregate plant, property, and equipment damages from Superstorm Sandy to the Port Reading refining facility and the Hess terminal network and retail sites were approximately $20 million. We could expect to see similar damages from future storms. An increase in the number and severity of extreme weather events due to climate change could result in damage to Hess assets located in coastal zones, offshore, or in inland areas vulnerable to tornados or flooding. The Property, Plant, and Equipment (PPE) values of assets in areas prone to hurricanes or other extreme weather events is about $8 billion. Severe weather events can also cause disruptions in exploration, and production, operations, which can lead to reduced revenue.” Newfield Exploration Co. (2013): “Newfield’s strategy consists of maintaining a diversified portfolio of core North American assets, with a near-term investment focus on oil and liquids growth. Therefore, changes in mean (average) temperature could have financial implications that affect volatility in the oil and natural gas commodity markets. For example, if crude oil prices decreased 10% from the company’s average realized prices during 2012 of $83.99 per Bbl, Newfield would have lost approximately $8.40 per Bbl, which at our 2012 production volume of 11,988 MBbls would equal approximately a $100 million reduction in revenues.”
