From rising sea levels to catastrophic weather events, investors can’t afford to ignore the risks of climate change. Since many companies would be vulnerable if current climate forecasts materialize, asset managers may want to consider climate change in their equity research process and engage management teams on the subject.
The Earth’s average surface temperature has risen about 1 degree Celsius since preindustrial times. More than 100 countries pledged as part of the 2015 Paris Agreement to limit further warming to 1.5 degrees Celsius by 2030, but that goal may be impossible if current trends continue. By 2100, the planet could be as much as 4.4 degrees Celsius warmer than it is today.
For context, consider that a 1-to-2-degree drop in the Earth’s average surface temperature kicked off the so-called Little Ice Age between 1300 and 1850. And a 5-degree drop 20,000 years ago encased a chunk of North America in ice.
Does this matter for equity investors? We think so. Below, we consider the four most important questions investors may want to consider when evaluating how climate change may impact a company.
1. How vulnerable is the company to extreme weather events?
Climate experts say that continued rising concentrations of greenhouse gases in the atmosphere will create adverse weather effects. That includes more intense hurricanes, more frequent storms, rising sea levels, flooding, drought and heat stress. Extreme weather threatens to damage critical infrastructure and endanger food supplies. We’re already seeing how it can affect corporate operations.
Persistent drought in California led to devastating wildfires that helped drive PG&E Corp. to bankruptcy. Smithfield Foods had to shut down operations in North Carolina during Hurricane Florence, and the storm’s floodwaters breached some of the company’s waste lagoons, polluting the surrounding area. The medical community suffered a critical shortage of intravenous bags and fluids after Hurricane Maria knocked out capacity at medical supply company Baxter International’s Puerto Rican plants.
The first step in assessing a company’s exposure to climate change is locating all its physical assets, including manufacturing plants, research and development sites, and retail stores, and determining how vulnerable they are to extreme weather. Tracing exposure down the supply chain is more difficult, but equally important.