The Corporate Risk of Climate Change

We all know climate change is happening. And we here at TriplePundit spend a lot of time making the business case for action. There are indeed many reasons for companies to respond to the threat. Those near the coast might face flooding, and those with production overseas could see disruption in supply. However, when it comes to reporting on this risk -- there are few benefits to making the connection between these "acts of god" and a larger global temperature rise.

See, public companies in the U.S. are already required to report on material risk to the SEC on their 10-K documents. And so, the fear goes, if climate change is listed as a risk, a company will appear vulnerable and may weaken its financial position. That's true even if the climate change risk is discussed in a sustainability report as opposed to more formal financial documents.

Silvia Garrigo, manager  of global issues and policy at Chevron Corp., explained during a break-out session at this week's Ceres conference: "The SEC has defined materiality in a legal way. If you have a separate mode of communication where you use the word in a different way and disclose different things, there is a big quandary."

Who decides what's material?

While the word "material" has a specific legal definition when it comes to financial reporting, things are a lot more fuzzy in the world of sustainability reporting. While the various reporting agencies have adopted the word "material" as a signal to companies that they need to get serious about reporting on the core issues, by pulling a word directly from the financial disclosure world they have created confusion and, for better or worse, pressure.

The goal of requiring companies to disclose risks is, of course, to give investors the information to make informed investment decisions. A natural tension exists, as companies want to present themselves in a positive light while following the letter of the law.

Garrigo pushed back against the sustainability reporters who called for increased disclosure via the 10-K. "The goal is to devalue the company based on stranded assets. There’s no reward for doing that."

Morgan Scott from the Electric Power Research Institute questioned the premise that the sustainability reporting community is pushing for companies to weaken their financial positions. "Is it really devaluing the company?" she asked. "The point is that you recognize the risk and can explain how you handle it." Theoretically companies that do so are stronger for it, but it is hard to say how the financial community would respond to radical transparency.

Connecting the dots to climate change

Even when a company's managers agree that the impacts of climate change need to be disclosed as risks, that doesn't mean that they are on board with blaming climate change. Leading climate change adaptation consultant Emilie Mazzacurati explained: "Given the way our financial system is set up, many of the true impacts of climate change are externalized from the system, so they aren't actually financial material." That is to say that, since companies aren't paying for the true cost of water or energy right now, the fact that these will be more expensive in coming years due to climate change is not a material risk worth reporting.

However, everyone agreed that the impacts of climate change are affecting companies now.

One participant, speaking under the Chatham House rule, explained that Hurricane Katrina caused $50 million in damages for a transportation company. However, the size of this company's market cap made this figure a drop in the proverbial ocean bucket. The incident was listed as an act of God, one of those disasters that just happen sometimes.

Does it matter if this and other weather-related disasters are caused by climate change?

Garrigo argued that it didn't really matter in terms of preparing for increasingly severe storms. "We have platforms to extract oil and gas that are fragile to droughts, fragile to hurricanes. Whether or not it is tied to climate change, we have a responsibility to make those systems more resilient." And they do.

However, I think it does matter how companies talk about these issues. Considering each individual storm on its own means that the increased collective risk will go ignored. We need companies to lead the way in recognizing climate change risks, since government lags behind in setting a price on carbon. Yet, until the rules of reporting catch up with the risks of climate change, companies have little incentive to do the hard work of projecting the true risks of doing business in a warming world.

Image credit: Jeff Rowley, Flickr