Sometimes extraordinary events can feel very normal,
and only seem remarkable with hindsight. We are living at a very extraordinary
moment—for the first time in our lifetime, one species has the
power to knowingly change the climate and ecological engine of the entire
planet. This will affect everything: commerce, culture, markets, societies.
And it will surely have investment implications.
Investors are rarely the first movers on any social or environmental issue, and
this one is no exception. However, once the investment community does focus on
an issue, action is often powerful. Indeed, investors are one of the few groups
of people capable of creating their own reality; if we all believe that climate
(or any other issue) is important, and invest that way, then companies with good
management of climate risks and opportunities will be more valuable than competitors
without them. That is, if we act like something is important to stock prices,
then it is—and vice-versa.
Climate change will have profound impacts on the financial performance of companies,
and the risk and return characteristics of investment portfolios. New risks and
opportunities have appeared, and these will grow as the climate continues to
change, as it assuredly will.
What climate change will do is make severe weather events more frequent. The
impact of severe weather can leave a deep imprint on corporate financial performance.
For example, Calvert recently examined the 10-Q (quarterly financial reporting)
statements covering the third and fourth quarters of 2005 of the largest 100
companies in the S&P 500. Nearly half reported measurable impacts from the
hurricanes of 2005 (and, in some cases, 2004 as well). While several companies—mostly
big-box retailers like Walgreens, Wal-Mart, and CVS—reported that the impacts
were not material, many others recorded more significant effects, almost all
of them losses. It is not particularly surprising that the oil and gas producers
and oil and gas services companies experienced significant damage from the Gulf
hurricanes; nor is it particularly shocking that companies with major refineries
or production facilities depending on petroleum feedstocks—such as Dow
and DuPont—were injured financially.
Insurance companies such as AIG, Allstate,
Metlife and St. Paul Travelers were hit hard as well. Sample quotes from 10-Q
reports include the following:
“Losses in the third quarter of 2005 include estimates of $3.68 billion
related to Hurricane Katrina and $850 million, net of reinsurance recoverable
of $205 million, related to Hurricane Rita.” (Allstate 2005 third-quarter
“The Company’s pretax cost of catastrophes, net of reinsurance and
including reinstatement premiums, totaled $1.52 billion ($1.01 billion after
tax) in the third quarter of 2005, all of which resulted from Hurricanes Katrina
and Rita.” (St. Paul Travelers 2005 third-quarter 10-Q)
“AIG currently estimates that its after-tax insurance-related losses, net
of reinsurance recoverables and including net reinstatement premium costs, from
Hurricane Wilma will be approximately $400 million.” (AIG 2005 third-quarter
• “Profits in the third quarter of 2005 were adversely affected by
hurricanes in the Gulf of Mexico, which required the company’s refinery
in Pascagoula, Miss., to be shut down on two separate occasions for about 40
days during the quarter, and normal operations were not restored until mid-October.
The storms also caused disruptions to the company’s marketing and pipeline
operations in the area. ... Average margins for refined products improved from
the year-ago period, but the effects were partially offset by increased refinery
downtime and operating costs relating to hurricanes. Earnings for the first nine
months of 2005 were $595 million, compared with $889 million in the corresponding
2004 period.” (Chevron 2005 third-quarter 10-Q)
These are the impacts that many informed investors expected to see. The Gulf
of Mexico is rich in oil and gas, and thus home to the operations of companies
dependent on fossil fuels and petrochemical production.
But the effect of severe weather was felt much more widely than in just the energy
and chemical businesses. Infrastructures suffered; electric utilities like Duke,
Dominion Resources and TXU all reported damage. BellSouth recorded a loss of
$102 million after tax for asset impairment (damaged facilities), as well as
reduced revenue of $51 million in proactive billing credits for service outages,
an increased allowance of $31 million for uncollectible accounts from displaced
customers, and $83 million in expense and $22 million in capital needed for network
restoration. Coca-Cola, PepsiCo, Target, McDonald’s and Carnival were all
hit with losses, and nearly all the financial services companies (Morgan Stanley,
Merrill Lynch, Citigroup, Bank of America, JP Morgan Chase and Wells Fargo) reported
significant impacts. In the consumer staples sector, Kimberly Clark, Anheuser
Busch, and Procter and Gamble took hits, as did Boeing, Lockheed Martin, Honeywell
and FedEx, among industrials.
It is important to remember that these impacts, deep and widespread as they were,
were only from hurricanes, and many of the reports only concerned the hurricane
season of 2005. Although not yet a consensus, there is persuasive evidence that
hurricanes have been made more severe by climate change, or specifically by the
warming of the oceans, whose warmth is the engine of a hurricane’s power.
According to the National Climatic Data Center of the National Oceanic and Atmospheric
Administration (NOAA), there have been 67 weather disasters in the United States
alone that caused at least a billion dollars’ worth (costs normalized to
2002 dollars) of damage since 1980—and of those, 19 occurred between 2000
and 2005. All together, these 67 events cost more than $546 billion and claimed
more than 22,300 lives, just in the United States. Global figures are much higher;
Allianz, for example, reports that climate change is responsible for about 160,000
deaths per year, and that total is likely to increase sharply. The number of
European floods has increased from one per year to 15 per year in recent decades,
and UK flooding could exact annual costs of as much as €30 billion.
Like everything else in investment, information is the key to emerging risks
and opportunities. Because the impact of climate change is so pervasive, the
information demands are unusually heavy. Investors must begin to grasp the basics
of climate prediction and its effects on the weather, pinned down to the degree
possible in space and time. It is also important to understand the shifting map
of greenhouse gas (GHG) emissions regulation, and how that affects corporations.
As the losses mount, it is entirely likely that the victims will seek recourse
in the courts, leading to increasing risks of litigation, which can be costly
to companies and their investors no matter what the outcome of any specific lawsuit.
While metrics for climate risk and opportunity management are still being developed,
investors can still make distinctions between companies based on their disclosures.
While there may be much happening behind the scenes, information that companies
make publicly available is essential to aiding investor judgments, and climate
change risk and opportunity disclosure is no exception.
The oil and gas services industry has long been thought of as an industry without
significant exposure to climate change risks and opportunities. Since most oil
and gas services companies are not large direct emitters of GHGs, many climate
change analysts did not consider the companies within the relevant at-risk industries.
Recently, we have learned something different altogether.
Noble Corp. is one of the largest and oldest oil and gas services companies in
the world. Noble operates contract drilling services with 62 offshore drilling
units located in key markets worldwide. As many would correctly assume, the company
is not a large direct emitter of GHGs, but Noble is still managing GHGs. While
the company’s emissions are much less than that of the energy-intensive
companies in the Electric Utilities industry, Noble has reduced its GHGs when
adjusted for increased operations.
More importantly is Noble’s climate change exposure to increased frequency
and storms. Offshore oil rigs are at serious physical risk from the increased
frequency and severity of storms, and many rigs suffered during the 2005 hurricane
season. Noble recognizes the importance of this increased frequency in its 2005
Sustainability Report. Noble’s response has been to increase the strength
and number of rig moorings along with improved GPS rig tracking systems that
help the company avoid potential rig movements and track those movements if they
Investors look for this type of disclosure and could potentially red-flag companies
that do not discuss the impending and significant risks and opportunities associated
with climate change. This company example is only one of the many positive indicators
for what is to come from climate change strategic management.