Soda. Tennis shoes. Climate change?
Consumer products may not trip the climate change alarm bells quite the same as coal power plants, but they, too, are part of the equation. Some of the world's leading companies, such as The Coca-Cola Company (NYSE:KO) and Nike (NYSE:NKE), are gradually realizing that embracing the controversial topic -- rather than fighting or ignoring it -- might be the best business strategy. That may surprise climate change deniers. In the last 10 years both Coca-Cola and Nike have encountered disruptions to their supply chains caused by volatile and unpredictable weather, more frequent floods, and increasingly intense droughts. That has stressed supplies of water, cotton, and labor (among other raw materials) and shifted the economics for each company's operations.
While Coca-Cola and Nike are taking action on climate change now, investors have to consider if their efforts will be enough to eliminate risks to their top and bottom lines. Floods and droughts will by no means force either behemoth into bankruptcy (we'll have bigger problems to worry about if that happens), but environmental conditions could eat away at growth opportunities. That's a scary possibility when you consider that the two are generally recognized as safe havens for investors. Have you thought about how a changing climate changes your approach to investing?
A changing climate forces changing business practices
It has become a highly polarized and politicized topic, but climate change is just as accepted as gravity in the scientific community. According to the United States Geological Survey, it threatens 1 billion of the Earth's inhabitants by the end of this century through rising sea levels alone. Don't think you can escape by moving away from waterways, either. The National Oceanic and Atmospheric Administration maintains data on all $1 billion weather disasters in the United States dating back to 1980, which shows that such events have occurred more frequently in recent years. Take a look at the seven billion-dollar disasters that took place in 2013:
Global emissions continue to rise each year, but that's not to say that progress in lowering greenhouse gas emissions isn't being made at home or abroad. The United States is switching vast amounts of power generation from coal to natural gas (although the coal mined in America is burned elsewhere) and captures over 12% of its electricity needs from renewable sources. Meanwhile, the global rate of increase in carbon dioxide was just 1.4% in 2012, which marks a pullback from historical rates. Even smog-ridden China took a significant step forward by sporting an annual increase of only 3%, which compares quite favorably to double-digit gains witnessed in the last decade.
The slowing pace of emissions increases is an encouraging sign, but despite the progress, emissions -- and atmospheric concentrations of carbon dioxide --are still rising. That underlying fact inches the world closer to the tipping point of environmental disaster each year. As the world takes steps to reduce the risks of climate change by boosting energy efficiency, increasing the use of renewable energy, and enacting sustainable practices, the risks posed by climate change move in the same direction; slowly eating away at the world's gains. It's a footrace that requires the world to get faster and faster each and every year.
In a way, the progress in emissions growth is analogous to the responses of individual companies and industries to climate change. The impact of money spent to insulate supply chains today -- switching to synthetic fibers instead of cotton or further increasing the efficiency of water recycling processes, for instance -- will be diluted by the challenges faced 10 years from now. It isn't something that will be shoved away with a fixed amount of investment. The diversity of supply chains and distribution networks is unlikely to help much, either. While Nike operates over 700 factories in nearly 50 countries and Coke products are available in over 200 countries, most raw materials involved are traded as global commodities. So a poor sugarcane harvest in Brazil or cotton harvest in China could affect sales on opposite sides of the globe.
Will climate change end growth for Nike or Coca-Cola? It's tough to say if it will "end" growth, but it is certainly an obstacle. Consider that the beverage giant is already facing increased pressure from its operations in India. Local groups and governments have voiced major concerns about depleted groundwater levels -- sometimes retreating by more than 100% -- in areas near bottling plants. The company will need to address water shortage concerns if it wants to balance growth with sustainability and make the most of its planned $5 billion investment in the country. Otherwise, investors may have to swallow substantial write-offs caused in part by climate change.
How does it affect you?
While the chances are low that Coca-Cola or Nike will face a significant pinch in the top or bottom line from climate change in any given year, both face increasing risks and volatility each year. The companies may be racing to insulate their supply chains where possible, but worsening weather and environmental conditions continue to chip away at any risk reduction measures. It would only take one unprecedented global drought or 1,000-year flood to cause significant pain for investors and have dramatic consequences for an annual period. Consumers shouldn't be surprised to see increased prices as companies try to hedge risks to their businesses.
Simply put, climate change can no longer be viewed a rallying cry to save the world's coral reefs and polar bears, or just as a tax on current generations to save future, unborn humans. The changing business strategies of Coca-Cola and Nike are encouraging signs that viewing the threat of climate change through an economic lens will provide the extra motivation needed by business and political leaders to enact tougher standards for energy efficiency, industrial emissions, and environmental stewardship. That's good news -- the clock is ticking.
Don't let climate change ruin your retirement