Corporate Assets Face Climate Risks, But Nobody Seems to Mind

(Bloomberg) -- Companies as diverse as Alphabet Inc., Swiss fragrance maker Givaudan SA, Hitachi Ltd. and Entergy Corp. are making investments that increasingly take into account how rising global temperatures and accompanying physical changes may affect their operations.

Their projects are called out within a private sector that’s not keeping up with the pace of risk, according to an analysis published Monday in the journal Nature Climate Change.

Many large companies have for years disclosed to their investors risks they face from either actual physical change or government and market responses to it. The university and non-governmental organization researchers found “significant blind spots in companies’ assessments of climate change impacts and in their development of strategies for managing them,” write four authors from the non-profits Conservation International and CDP, and Arizona State University and the University of Durham.

The team, led by Allie Goldstein of Conservation International, reviewed more than 1,600 corporate disclosures about climate adaptation that were filed for 2016 to CDP, which runs a climate disclosure clearinghouse for companies, subnational governments and investors.

Forward-thinking strategy and investments could help limit future threats to supply chains, employees and customers, they write. Previous estimates of climate impacts on the global financial sector range from $2.5 trillion to $24.2 trillion, with valuation risks to assets rising to not quite double that range. “Yet the financial disclosures of major companies give little inkling that up to 30 percent of manageable assets globally may be at risk,” they write.

Types of Adaptation

Three categories of adaptation strategy emerged from the analysis: “Soft adaptation,” which includes risk analysis, supply-chain organization and communication; “hard adaptation,” or capital investments in technology and infrastructure; and “ecosystem-based adaptation,” which requires sustainable management, conservation and restoration of ecosystems.

Google-owner Alphabet drew attention for energy efficiency investments that will pay off as the company requires more energy to cool its data centers. Hitachi incorporates flood risks into facility-siting strategy and when necessary will build engineered safeguards, such as barriers to block flood water.

Particularly noteworthy, the researchers suggest, are projects that strengthen ecosystems “beyond the fenceline” of the company, such as Givaudan’s conservation agreements with the Venezuelan farmers who produce tonka beans the company buys for its fragrances that come from a tree related to peas. Entergy has invested in wetlands restoration as a buffer against infrastructure on the Gulf coast.

‘Blind Spots’

Despite widespread climate disclosures, companies collectively have several “blind spots” when it comes to managing risks, including absent or insufficient accounting of possible costs; a “narrow view of risk” that often fails to take into account whole-ecosystem dynamics; and consideration of dramatic and unpredictable threats.

Katherine Greig, a senior fellow and strategic adviser at the Wharton Risk Center who was not involved in the study, said it helpfully sorts corporate adaptation strategies and tactics into descriptive categories. What it doesn’t set out to do is put climate risks in the context of other threats that companies face every day, like market fluctuations, technological growth, and cyber risks, or political and regulatory change.

Companies already seeing climate-related threats are consequently adjusting their operations and investments to account for new risks. Necessity is likely to drive corporate change more than disclosure practices, she said.

The study cites Mark Carney, governor of the Bank of England and Financial Stability Board chairman, who in 2015 called climate change a “tragedy on the horizon,” and 2017 guidance to companies from the Task Force on Climate-Related Financial Disclosures he set up. (Michael Bloomberg, founder of Bloomberg News parent company Bloomberg LP, serves as TCFD chairman.)

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