The new normal of climate change–from increases in flooding and hurricanes to intense wildfires–is already costing companies money. But a new study suggests that they’re underestimating future climate risk to their businesses, and vastly underreporting the financial implications to investors.
“We found five key blind spots in companies’ understanding of climate risks,” says Allie Goldstein, a scientist at the nonprofit Conservation International and one of the authors of the study that appeared in Nature Climate Change, which combed through reports that more than 1,600 companies made to CDP, an organization that gathers data for institutional investors. “One was the magnitude of the financial implications.”
Global estimates of the cost of climate change are in the trillions of dollars, she says, but the financial risk reported by all of the companies collectively was at least two orders of magnitude smaller. In part, that’s because some companies report risks without estimating the associated cost. And many companies may simply be underestimating the risk they face.
That’s not to say that they’re fully unaware of the problem. A separate report out today from CDP gave some examples from companies with locations in the U.S. Real estate companies with holdings in Florida and Texas are concerned about hurricanes and sea level rise, and the risk that insurance payments won’t fully cover losses–or that insurers may choose to drop policies. Unilever sees the risk of drought impacting one of its factories in Arizona (and the supply of ice cream to the West Coast). McDonald’s is thinking about how changing weather patterns will affect the farms growing its ingredients. Some companies have connected climate risk to their own need to cut emissions–like Ryder, the truck company, which suffered millions in damages during Hurricane Sandy and recently invested in a fleet of 1,000 electric vehicles.
There are construction companies that are thinking about the risk of workers not being able to work in extreme heat waves. Airlines are thinking about planes not being able to fly, as happened in Phoenix last year when some midday flights were canceled as the temperature was forecast to hit 120 degrees. Globally, some companies are thinking about the risk of employees getting sick from an increase in mosquito-borne illnesses. And the list goes on.
But the study found that companies were missing the full picture. Another study suggests that climate change could reduce average incomes by 23% by the end of the century; yet another study suggests that consumption of goods could drop as much as 20%. But most companies aren’t considering a possible loss of customers. Most of the risks that companies identified (and potential adaptation strategies) focused on direct impacts to their own operations, not what might happen in society at large, or even in their supply chains. They also tend to focus on the problems that are most obvious–such as extreme weather events that are already happening–rather than the risk of more radical, abrupt changes, like the melting of the Greenland ice sheet and sudden sea level rise, or the dieback of the Amazon rainforest. For the risks that they are reporting, most companies haven’t reported the cost of those risks or the costs of adaptation. Even a single event can incur massive costs; when monsoons flooded Thailand in 2011, for example, Hewlett-Packard had to shut down a hard drive factory there and lost $4 billion.
All of this means that it’s not possible for investors to truly understand which companies are most likely to survive. “The state of reporting to investors right now is not sufficient to essentially pick winners,” says Goldstein. That’s bad news for anyone with a retirement account. But some progress is happening, the researchers say. The Financial Stability Board, an international organization that monitors the financial system, set up a task force that developed guidelines for companies to report climate risks, and investors are beginning to promote those guidelines. “We are seeing companies that have acknowledged those [guidelines] are changing the way they report as a result,” she says. “So I think there’s definitely positive movement in that direction.”