Many of the world's largest companies, from Silicon Valley tech firms to large European banks, are preparing for the possibility that climate change will significantly affect their profits over the next five years, according to a new analysis of corporate disclosures (or notes to financial statements).
Under pressure from shareholders and regulators, companies are increasingly disclosing the specific financial effects they may face as the planet warms, such as extreme weather that could affect their supply chains or more stringent climate regulations that could hurt the value of coal, oil and gas investments. Early estimates suggest that billions of dollars could ultimately be at risk.
Even so, analysts warn that many companies are still not taking into account all the potential financial risks that global warming could produce.
“The numbers we're seeing are already huge in and of themselves, but clearly this is just the tip of the iceberg,” commented Bruno Sarda, the North American president for CDP, an international nonprofit organization that drafted the new report and works with companies around the world on public disclosure of the risks and opportunities that climate change could pose to their businesses.
In 2018, more than seven thousand companies submitted reports to CDP, formerly known as the Carbon Disclosure Project. In addition, for the first time, CDP formally asked companies to try to calculate how global warming would affect them in financial terms.
After analyzing documents submitted by 215 of the world's 500 largest corporations, CDP found that these companies would be facing $1 trillion in climate change-related costs in the decades to come if they do not take proactive steps to prepare. By the companies' own estimates, most of these financial risks could begin to materialize in the next five years or so.
The disclosures show how business leaders expect climate change, and policy responses to it, to spread to all corners of the global economy.
Many firms are preparing for direct impacts. Hitachi Ltd., the Japanese manufacturer, noted that increased rainfall and flooding in Southeast Asia had the potential to eliminate suppliers and was taking defensive measures as a result. Banco Santander Brazil, a large Brazilian bank, reported that increased severe droughts in the region could impair customers' ability to repay loans. Google's parent company, Alphabet Inc. noted that rising temperatures could increase the cost of cooling in its data centers, which devour electricity.
Cooling Google's power-hungry data centers could become more expensive, its parent company said. Pictured is a data center facility in Iowa. Credit Brian Snyder/Reuters
Other companies are closely watching the public's possible reaction to climate change. Total, a French energy company, is confronting the possibility that ambitious efforts by nations to limit global warming and restrict fossil fuels will cause some oil and gas reserves to become “unburnable”. BASF, a German chemical company, said it has a “significant corporate carbon footprint,” which may scare off environmentally conscious shareholders if it does not take steps to act against climate change.
In total, the world's largest companies estimated that they may have to write off or retire at least $250 billion of assets as the planet warms. These assets include buildings in areas at high risk of flooding or power plants that may have to be shut down in response to stricter pollution-related rules.
Disclosures provide only a partial picture of the potential cost of climate change. Currently, only a fraction of companies worldwide report on their climate risks, and many large firms, including energy giants Exxon Mobil and Chevron, did not submit a disclosure to CDP last year. Companies that do disclose often struggle to find out precisely how higher temperatures could hurt or help their finances.
For example, according to Sarda, companies have almost no difficulty calculating the potential costs of a tax increase designed to curb emissions of carbon dioxide, one of the main greenhouse gases contributing to global warming. Indeed, this is one of the most common climate-related risks now disclosed by companies. However, it is more difficult to take scientific reports on rising temperatures and extreme weather and ascertain what those broad trends might mean for specific companies in specific locations.
Previous studies, based on computer modeling of climate, have estimated that climate change risks, if left unaddressed, would cost between $1.7 trillion and $24.2 trillion to the global financial sector in net present value terms. A recent analysis published in the journal Nature Climate Change warned that companies are reporting on these risks only “sporadically and inconsistently,” and often have a narrow view of the dangers that could occur in the future.
Crews working on power lines after last year's Camp Fire in Paradise, California, which contributed to Pacific Gas and Electric's bankruptcy filing Credit Eric Thayer for The New York Times
On the flip side, the CDP report found that many companies also see the potential to make money from climate change. Some 225 of the world's largest corporations highlighted roughly $2.1 trillion of potential opportunities in an increasingly warming world, with most expected to materialize in the next five years.
Eli Lilly, a U.S. drugmaker, cited research suggesting that rising temperatures could lead to the spread of infectious diseases: a problem for which the company is well positioned. “This situation would increase demand for certain medicines that we produce,” the firm said (at the same time, the company also warned that climate change could hurt it in economic terms if flooding and stronger storms affected its production plants in places like Puerto Rico, as happened after Hurricane Maria in 2017).
In addition, any kind of shift to clean energy sources offers an opportunity for profit. ING Group, a Dutch financial services firm, estimated that shifting to a low-carbon economy would require $30 trillion in new investments globally in clean energy and energy efficiency. As a result, ING is looking to double its “climate finance portfolio” by 2022, the company said in its disclosure.
The report comes after financial regulators have expressed growing concern that markets have yet to fully appreciate the potential financial consequences of climate change. Last month, the European Central Bank warned that a spate of severe weather that generates significant losses for insurers, or a sharp and unexpected turn by investors away from fossil fuels could affect the balance sheets of unprepared banks and could even destabilize the financial system.
“Climate change-related risks have the potential to become systemic for the euro area, particularly if markets do not calculate the risks correctly,” the bank said.
In 2015, the Financial Stability Board-an influential panel made up of finance ministers, central bankers and regulators from the world's largest economies-created a team to persuade banks and other businesses to be more transparent about their risks in the face of a changing climate. However, progress has been slow.
The CDP report found that companies based in the European Union are much more likely to provide details on the potential financial effects of global warming, in part because local regulations often require them to do so. In contrast, companies in the United States, China, Brazil and Mexico were much less likely to report significant financial risks.
