The 800-Pound Gorilla

Many companies are not disclosing one huge material risk.

By Mindy S. Lubber

If you were responsible for a $36 billion investment portfolio, you’d want as much information as possible. So does Nancy Kopp.

As Maryland’s state treasurer, Kopp chairs the Maryland State Retirement and Pension System Board, which oversees the state’s $36 billion dollar pension fund. The trouble, Kopp says, is that many companies don’t fully disclose a key material risk hovering over their future performance: climate change. Without robust corporate disclosure, the state’s investment managers can’t truly know how risky their investments are.

Kopp’s predicament is not unique. This current lack of information should worry hundreds of other major fiduciaries around the country like Kopp. Her dilemma is theirs, too.

For those who think climate change is a sector-specific risk, think again. It affects everything from commodity prices to insurers’ exposure to global supply chains. For industries ranging from agriculture to apparel, electric power to insurance, healthcare to tourism, and mining to energy, the bottom-line risks are real.

Here’s just a tip-of-the-iceberg sampling of actual business impacts from 2011’s extreme weather events:
• More than 160 companies in Thailand’s textile industry suffered production losses when flooding stopped about a quarter of the country’s garment manufacturing—much of it for companies in the United States.
• Electric power company Constellation Energy experienced reduced quarterly earnings of about $0.16 per share due to the record-setting Texas heat wave that forced it to buy incremental power at peak prices.
• Drought in Texas also caused more than $2 billion of cotton losses, raising prices, and limiting supplies for apparel companies that source from the state.
• U.S. property insurers experienced some $32 billion in insured losses, second only to losses in 2005 when Hurricane Katrina hit the Gulf Coast. Much of last year’s damage occurred away from the coast, including hurricane-driven storms in Vermont, hailstorms in Arizona, and wildfires in Texas.

The overwhelming scientific consensus tells us that climate change promises to increase both the frequency and severity of heat waves, drought, and other such events. In fact, it’s already happening. But when robust corporate risk disclosure is missing, one of the hallmarks of a transparent and fair marketplace goes missing as well.

So last month an investor coalition formed by Ceres, which directs the $10 trillion Investor Network on Climate Risk (INCR), along with Calvert Investments and Oxfam America, issued a new guide for companies and investors navigating this unprecedented risk terrain. Physical Risks from Climate Change: A Guide for Companies and Investors on Disclosure and Management of Climate Impacts is a tool companies can use—and investors can monitor—to improve their analysis and management of climate change risks.

It provides detailed checklists for companies to guide them in assessing, disclosing, and managing the climate change risks they face within their operations and supply chains.

It’s an important step on the long road to corporate climate-risk transparency, and it’s clearly necessary: Climate risk quite simply is a material risk. That’s why the U.S. Securities and Exchange Commission has already issued formal guidance on how companies should integrate it into their financial filings. For many companies, it could well be the 800-pound gorilla of material risk in the coming years and decades.

Bennett Freeman, senior vice president of sustainability research and policy at Calvert Asset Management Company, puts it bluntly: “Companies that do not address climate risk are sharing their risk with investors.” But Freeman also points out an upside to this kind of assessment and disclosure: “Investors will gain value from companies with the foresight to adapt.”

The crisis of climate change is a major opportunity as well—one that challenges companies to be more competitive and investors to be more successful even as disclosure helps mitigate climate risk. With proper disclosure, what gets measured gets managed. That’s a clear win for all sides.

Disclosure is also taking center stage in the business world. The global Rio+20 Earth Summit in Brazil made mandatory disclosure of climate risks and “sustainable stock exchanges”—where listed companies are expected to incorporate sustainability into public disclosure and overall decision making—a centerpiece of its agenda. A core group of five stock exchanges, including the NASDAQ, BM&F BOVESPA, the Johannesburg Stock Exchange, the Istanbul Stock Exchange, and the Egyptian Exchange supported the idea.

Physical Risks from Climate Change is a great tool for helping many more companies, and the stock exchanges that list them, to achieve meaningful disclosure and action on climate change so that investors like those who work with Kopp can achieve the long-term returns they are entrusted to deliver.

Mindy Lubber is president of Ceres and director of the $10 trillion Investor Network on Climate Risk.

Posted July 13, 2012 in Environment