Why doing nothing is the biggest corporate climate risk of all

Companies in the benchmark S&P 500 Index own physical assets across 68 countries globally - with 60% holding assets that are at high risk of at least one type of climate change-related physical risk. In this light, the need for determined action to reduce greenhouse gas emissions and limit the effects of climate change poses important transition risks for companies and investors through regulation, changing market dynamics and technology, among other factors.

Understanding climate risk depends on transparency around the geographic exposures of assets and operations. But companies’ exposures and resilience don’t conform to clear patterns, highlighting the need for in-depth investor analysis to evaluate climate risk at the asset and company level. It’s important to note that the location of assets is the key factor in determining the extent of these risks - more than the industry or sector in which a company operates.

Granted, it’s not possible to definitively say that climate change has “caused” a particular event, but the scientific community has a higher level of confidence in certain areas, such as extreme temperatures and precipitation rates, given that there is more data to analyze. S&P Global data show that heatwaves, wildfires, water stress and hurricanes linked to increasing average global temperatures represent the biggest physical risks for S&P 500 companies.

S&P Global Platts analysts estimate that an adherence to historic trends would send energy-combustion carbon dioxide (CO2) emissions skyrocketing to approximately 50 gigatonnes by 2050, up from 35 gigatonnes today. Platts’s most likely scenario envisions emissions stabilizing after peaking soon after 2025. This is still far above needed targets.

Even a stabilization of our CO2 output would fuel further climate change, because we currently pump CO2 into the atmosphere at a faster pace than natural processes such as photosynthesis and oceanic absorption can filter out. Absent a significant turnaround in this trend, climate change is almost certain to cause continued substantial losses to infrastructure and property, and, worse, increased illness and death. According to estimates from the World Health Organization (WHO), anthropogenic climate change was already leading to at least 5 million cases of disease and more than 150,000 deaths annually as long ago as 2000—that’s 20 years ago. Considering that WHO now projects annual deaths will reach 250,000 in the period 2030-2050, and it’s clear that anything less than decisive, widespread action is an imminent danger - not just to future generations, but to the almost 8 billion people alive today.

All told, physical and transition risks are rising and will impact companies differently based on the geographic distribution of their assets. Trucost, part of S&P Global, recently launched its Climate Change Physical Risk Analytics, helping companies and investors understand their exposure to a range of physical risks at the asset level including floods, droughts, wildfires, heatwaves and extreme weather events. Trucost predicted in March last year that 2019 would be the year in which companies transform the way they manage climate-related issues; that environmental, social, and governance (ESG) concerns are critically important to capturing mainstream investor attention; and that ESG issues are reshaping business models across a broad swathe of corporate America. Given all of the focus on ESG in financial markets - with lenders and investors, among others, all seeking greater clarity around the prospects for sustainable finance - this is ringing true.

For now, much of the effort to address the risks of climate change have come in the area of adaptation - that is, adjusting to the effects, rather than trying to prevent them (because, in many cases, they’re already happening). Unfortunately, some estimates place adaptation funding needs by 2030 at as much as nine times what is now being spent. And the gap isn’t just a problem for emerging economies. While developed countries are more resilient to extreme weather events, many need substantial adaptation investments to prepare.

In particular, power-generation companies are typically exposed to high carbon-pricing risks, but physical risks vary significantly based on the geographic operations of each company. Conversely, S&P 500 financial firms with low emissions generally have lower carbon-pricing risk exposure, but in some cases own assets at high risk of physical climate change.

Other sectors also face heightened risks. For example, real estate investment trusts (REITs) are exposed to moderate or high risk of inundation due to sea level rise, highlighting the need for effective planning and flood-mitigation measures to preserve asset values. Similarly, mining properties owned by S&P 500 companies are exposed to high risk of water stress, with significant potential effects on operational efficiency and operating costs.

In the end, for these sectors - and for all of us - the biggest risk may be inaction.