Climate risk and the corporate bottom line

Stock prices of companies are still not factoring in risks attributable to changing climate factors. Investors at large are oblivious of the connection between corporate performance and the implications of climate risk.

How do automobile manufacturers fare in light of changing enviornmental regulatory requirements? What happens to a water / beverage company when its raw material sourcing region becomes drought prone? How do climatic variations impact food companies and agrarian ecnomies? What should the risk insurance rates and depreciation timeline be for industry located near coastal regions?

In 2005, the UNEP Finance Initiative helped facilitate a conversation amongst institiutonal investors, corporates and agenices that have been on the forefront of thinking about these issues. The report which was released in 2006 articulated a framework for climate risk disclosure:

1. Regulatory risk: while there is unlikely to be any legislation in India in the near future, what is the implication of pending regulation in markets being exported to by industries that have a significant carbon footprint. Sectors such as textiles, have a significant export percentage. As international governments begin to address climate change by adopting new regulations that limit greenhouse gas emissions, companies with direct or indirect emissions may face regulatory risks that could have significant implications. Investors seek to understand these risks and to assess the potential financial impacts of climate change regulations on the company.
2. Physical risk: To help investors analyze these risks, investors encourage companies to analyze and disclose material, physical effects that climate change may have on the company’s business and its operations, including their supply chain. Specifically, investors urge companies to begin by disclosing how climate and weather generally affect their business and its operations, including their supply chain.  These effects may include the impact of changed weather patterns, such as increased number and intensity of storms; sea-level rise; water availability and other hydrological effects; changes in temperature; and impacts of health effects, such as heat-related illness or disease, on their workforce.  After identifying these risk exposures, companies should describe how they could adapt to the physical risks of climate change and estimate the potential costs of adaptation.

The Investor Nework on Climate Risk (a Ceres project), goes further to outline an additional risk element for companies operating in other regions i.e. litigation risk (click here for more).

Since then some global investors have rallied around to get corporates to quantify more of these risk elements. Some groups that have been at the forefront of such action are Investor Group on Climate Change Australia / New Zealand, Ceres/ Investor Nework on Climate Risk, Institutional Investors Group on Climate Change.

Call to Action

Is there investor interest in India to get corporates to quantify risk related to climate factors? In case you are interested in this issue, please write to us. We hope to organize a private investor discussion in the next couple of months in Delhi / Mumbai.

For more background on this issue,
. Examples of disclosure from leading corporations
. Global Framework for Climate Risk Disclosure
. Climate Change - A Risk Management Challenge for Institutional Investors
. Climate Change & The Financial Services Industry