What if I told you that there's a business risk out there that 90% of companies in the S&P Global 100 index perceive as legitimate, but that few are managing in any real fashion? What if I said further that while some companies view this risk on a 10-year time horizon, others are feeling its effects right this minute, and they're still not really handling it? You'd probably want to know what this risk is.
Well, it's climate change. I know, you may be rolling your eyes, or getting hot under the collar as you dismiss the whole notion as a liberal conspiracy. Hang with me for a bit, because this is no longer just academic. Stuff is happening now, and companies with no points to score are getting serious about understanding the threats climate change poses to their operations.
Already feeling the pain
The science is pretty well settled on the proposition that climate change is adding to the frequency and intensity of extreme weather events. Companies are feeling the pain in some very direct ways. When the flooding happened in Thailand in 2011, for instance, Honda (NYSE:HMC) lost more than $250 million when its automobile assembly plants were inundated. Around the same time, severe flooding in Australia contributed to a 38% decline in insurer Munich Re's quarterly profits.
A new report out today from the Center for Climate and Energy Solutions (C2ES) provides a glimpse into the way major corporations are looking at this. Among climate change risks, they're most concerned about damage to facilities, loss of water or power supplies, higher costs, and disruption of supply and distribution chains. But C2ES notes that few companies have a truly robust strategy for dealing with climate change risk.
Why would that be? Well, it has a lot to do with uncertainty. C2ES attributes it to "a lack of information and tools to help them relate these risks to their specific business operations." Certainly, Ford's (NYSE:F) survey response seems to bear this out: "Based on [our] assessment of the physical risks associated with climate change, we do not believe we can adequately predict the potential impacts of climate change on our business beyond noting the risk posed by natural or man-made disasters."
Action doesn't require certainty
But if business leaders always waited for certainty before taking action, would they ever get off the ground? Of course not. Agile companies are making plans and developing strategies right now.
One mechanism is to transfer climate change risk through insurance. C2ES describes how Merck (NYSE:MRK) works with its insurers to evaluate potential risks and to take corrective actions for all facilities in low-lying areas, or those in other ways exposed to severe weather risks.
Action doesn't just have to be on the risk side. GE (NYSE:GE) sees tremendous opportunity in being a part of the solution. In light of the threat climate change poses to fresh water supplies, the company is expanding its water technologies -- from wastewater treatment and reuse technologies to desalination equipment -- for use in power plants, agriculture, and manufacturing. Global spending on water infrastructure is projected to grow from $90 billion in 2010 to $131 billion in 2016. GE expects revenues from its water recycling technologies to grow by about 10% annually through at least 2016.
Getting it right
C2ES outlines how Weyerhaeuser (NYSE:WY), one of the world's largest forest products companies, is setting a strong example in responding to this pressing challenge. Changes in climate influence the structure and function of forests, and projections show that effects going forward will be more severe and damaging than in the past. Weyerhaeuser's risk analysis relies on close monitoring of its timberlands using geographic- and species-specific forecasting models and sensing technologies. The company has regional research partnerships to study and protect its vulnerable water resources, and is developing tree varieties that can withstand drier summers.
Weyerhaeuser has also found opportunity in all of this. Weyerhaeuser Solutions, launched in 2011, helps others with large-scale land holdings to manage landscapes for optimal water supply and quality, reduce carbon footprints, and source bio-energy feedstocks, among other things.
The important message here is that it's not all doom and gloom. Through the dark veil of climate change, companies are emerging as management leaders and dynamic solution providers. Certainly the risk is grave, but so is the opportunity. Long-term investors would do well to include climate change as a factor in their stock analyses. Look for strong and candid discussion of the topic in 10-K risk sections, as well as initiatives to capture emerging opportunities. Because at this point, choosing to ignore climate change is a losing proposition in the long run.