The Atlantic hurricane season, which begins in June and lasts through November, is upon us. Coastal homeowners have reason to worry. Shareholders do the same.
Until recently, reinsurers և banks carried most of the market risk of climate change. Now everything is changing. Some companies are openly responsible for the risks of global warming. Court in The Hague ordered Royal Dutch Shell to reduce its emissions. International Energy Agency says energy groups should suspend new oil and gas projects to have zero emissions by 2050.
Indeed, the market fines for climate risk-taking companies are wider than we could have imagined. Report introduction from Pentland Analytics, “Risk, reputation և accountability”, watched several episodes of extreme disaster, including the 2017 hurricane season, which was The most expensive in US history,
Author Deborah Pratt surveyed listed companies in the United States with annual revenues of more than $ 5 billion, which revealed the financial losses of Hurricanes Harvey, Irma and Maria. Modeling their stock price response over the year, he found an average 5% discount on the S&P 500, equivalent to $ 18 billion worth of shareholder losses.
Pretty also tested companies that have more than 10 percent of the global value of their property insured in the affected area to see what precautions they have taken to protect against flooding or wind. Among the companies that reported financial losses, less than half of the proposed measures were implemented. On the other hand, among those who did not register material financial losses, almost two thirds of the proposals were completed.
Bottom line: Market perceptions of adverse outcomes from such natural disasters have “turned from bad luck to bad governance,” says Pretty. Stock prices now reflect whether the C-Group takes climate change risk seriously. Indeed, Pretty’s research shows that leading companies are those that value stability more than a balance sheet transaction. In other words, they take every possible action to mitigate such risk, even if the models show that the risk is small.
This may confuse economists, but as an engineer interviewed in the study, saying: “Look, if you have four holes in your boat, and you connect three of them, you will still sink.” That’s part of the argument for the sustainability of economic “efficiency”, which affects not only climate disaster preparedness, but also supply chains (companies are starting to shorten them) and cyber risk. Pretty notes that poorly prepared companies that were attacked in 2010-2020 underperformed the market by 20% in the year following the attack.
If regulators have their way, those risks will become clearer, especially with regard to climate. G7 leaders last week announced their commitment to mandatory climate financial disclosures modeled on those proposed by the G20 Climate Disclosure Assurance Recommendation Force. This provides a roadmap for how to integrate climate risk standards into corporate governance strategies.
Europe has made more progress than the United States in forcing companies identify such a riskThe best body to create and enforce such a settlement in Washington would be the Securities and Exchange Commission. But under President Donald Trump, the SEC eased regulations and failed to address climate change at all. The US government still subsidizes coastal flood insurance, even as cities like Miami are considering building multibillion-dollar walls to prevent tides.
If the Biden administration has its way, it will change. The SEC, now headed by ambitious regulator Gary Gensler, has just completed a public comment on the ESG reporting rules. Gensler says He wants to bring “consistency և comparability” to what companies say. This could mean specific emissions reporting standards, such as information on the number of companies the company has, or preventive measures they have taken around flood zones.
Some activists are demanding an extremely thorough revelation of water insecurity, heat stress, the extent to which businesses can be affected by disease, political unrest, and migration. Report from the American Center for Progress in FebruaryCo-authored by Andy Green (now Senior Competitive Markets Advisor, US Department of Agriculture), the possible scope of future reporting requirements is presented.
If companies have to quantify their ECG tracks in ways that make it easy to compare the efforts of industries և individual enterprises, it is difficult to overestimate what impact they can have on the market. For example, the impact of a garment manufacturer on agricultural products (the potential for further crop damage through drought, heat, or epidemics) can have a drastic effect on shareholder value. The price of carbon for some exporters can change the bill – long-distance freight transportation of heavy equipment, such as long-distance freight, is much more costly. Asset managers who invest too much in high carbon sectors can be considered a breach of their responsibilities.
As the hurricane season begins, we can change the markets, as well as the weather at sea.