Un­der­es­ti­mat­ing cli­mate change cheats in­vestors

Centre Daily Times (Sunday) - - Opinion - BY MARK BUCHANAN

As the ef­fects of cli­mate change un­fold, its im­pact on busi­ness will grow more se­vere: al­tered rain pat­terns will af­fect agri­cul­ture, floods will dis­rupt sup­ply lines, heat waves will pre­vent em­ploy­ees from work­ing. If mar­kets are to work well, in­vestors need to know about these con­se­quences, and the num­ber of com­pa­nies that vol­un­tar­ily dis­close their es­ti­mates of cli­mate-linked risks has risen markedly over the past 15 years.

Of course, in­for­ma­tion only helps if it’s ac­cu­rate. A com­pre­hen­sive new study has as­sessed the plau­si­bil­ity of these cor­po­rate dis­clo­sures, com­par­ing them to the best sci­en­tific and eco­nomic es­ti­mates of the likely costs of ad­just­ing to cli­mate change. The good news: Ev­ery year, more busi­nesses start tak­ing cli­mate risks more se­ri­ously. How­ever, cur­rent re­port­ing also has se­ri­ous blind spots that could leave in­vestors un­in­formed and ex­posed.

In 2015, Bank of Eng­land Gov­er­nor Mark Car­ney warned in a speech to Lloyd’s of Lon­don about the “Tragedy of the Hori­zon,” his term for global risk aris­ing from the in­her­ent dis­par­ity be­tween the short-term think­ing of fi­nan­cial mar­kets and the long-term na­ture of cli­mate. Com­pa­nies con­cerned with press­ing chal­lenges, he sug­gested, may not be ac­cu­rately dis­clos­ing to in­vestors the risks they face due to cli­mate change. To test Car­ney’s hunch, Al­lie Goldstein of the en­vi­ron­men­tal or­ga­ni­za­tion Con­ser­va­tion In­ter­na­tional and col­leagues took the vol­un­tary dis­clo­sures made in 2016 by more than 1,600 large com­pa­nies world­wide and com­pared the risk es­ti­mates within to es­ti­mates from sci­en­tists and econ­o­mists.

Ac­cord­ing to their find­ings, most compa- nies ex­pect cli­mate change will in­crease their op­er­a­tional costs and re­duce or dis­rupt pro­duc­tion ca­pac­ity due to events such as floods, drought or hur­ri­cane dam­age. And aware­ness is grow­ing rapidly: The num­ber of com­pa­nies see­ing such risks as ei­ther “vir­tu­ally cer­tain” or “more likely than not” to oc­cur surged from 34 per­cent in 2011 to 67 per­cent in 2016. Yet se­ri­ous com­pla­cency per­sists.

Econ­o­mists have used so-called in­te­grated as­sess­ment mod­els to make crude es­ti­mates of the likely costs that will be in­curred deal­ing with the phys­i­cal as­pects of cli­mate change. Through 2100, this ap­proach leads to fig­ures vary­ing from around $2 tril­lion to $20 tril­lion, or 2 to 20 per­cent of cur­rent to­tal fi­nan­cial as­sets. In strik­ing con­trast, Goldstein and col­leagues found, com­pa­nies es­ti­mate their fi­nan­cial risk only in the tens of bil­lions of dol­lars. That’s an alarm­ing 100 times smaller than even the most con­ser­va­tive sci­en­tific es­ti­mate.

An­other prob­lem the re­searchers found: Busi­nesses seem to be ig­nor­ing the in­di­rect costs that might arise from dis­rup­tions to sup­ply chains or changes in cus­tomers’ be­hav­ior. For ex­am­ple, es­ti­mates of how ris­ing tem­per­a­tures will im­pact pro­duc­tiv­ity by 2100 fore­cast a 20 per­cent drop in global in­come per capita, which would nat­u­rally lead to fall­ing over­all de­mand for goods and ser­vices. Even so, fewer than 3 per­cent of com­pa­nies on their dis­clo­sures con­sid­ered it plau­si­ble that cli­mate change could im­pact their busi­nesses this way.

It looks like Car­ney was right about fi­nan­cial mar­kets ig­nor­ing cli­mate risks, which raises ques­tions about their abil­ity to steer in­vest­ments wisely. This mighthave to do with the cul­ture of busi­ness it­self, as main­stream busi­ness mod­els gen­er­ally work on the as­sump­tion that cur­rent eco­nomic and so­cial con­di­tions will con­tinue into the in­def­i­nite fu­ture, re­gard­less of what hap­pens to the Earth’s en­vi­ron­ment.

AC­CORD­ING TO THEIR FIND­INGS, MOST COM­PA­NIES EX­PECT CLI­MATE CHANGE WILL IN­CREASE THEIR OP­ER­A­TIONAL COSTS AND RE­DUCE OR DIS­RUPT PRO­DUC­TION CA­PAC­ITY DUE TO EVENTS SUCH AS FLOODS, DROUGHT OR HUR­RI­CANE DAM­AGE.

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