Without question, some companies stand to be harmed by climate change, while others could benefit from new opportunities. Still others are merely afraid to be impacted by regulation. However, no company is untouched by this issue that investors increasingly study…
In the cross hairs: traders insurance companies are vivid examples of companies who have much to lose from the more frequent storms and coastal flooding that is already starting to be felt. Some of the earliest adopters of low-carbon policies were reinsurance firms such as Munich Re and Swiss Re.
Needless to say, these firms will raise their rates when claims escalate — Which means we will all ultimately pay. But this is not a one-sided deal: When insurance becomes too expensive to buy, the insurers lose, too.
In a 2010 interview with Der Spiegel, Nikolaus von Bomhard, CEO of insurance giant Munich Re had this to say about his company’s climate change preparations: “We can substantiate this warming and its effects… ” he said. “If we are looking to have 100 percent certainty about each and every detail, it’ll be too late to find solutions.” Munich Re will be carbon neutral by 2015.
Seizing opportunities: As an industrial company, General Electric has much less to lose than an insurer. After an internal study in 2005, the company labeled climate change as a valid concern — so, they embraced it as a business opportunity. In a recent Financial Times article, Mark Vachon, head of GE’s “Eco-magination” sustainability business, underscored that the claim. His evidence: Eco-magination revenues now total more than $100bn and are growing at more than twice the rate of those in the rest of the company.
Looming issues: Large institutional investors are concerned about emissions from company operations, and nowhere is this more evident than the natural resource, power generation and energy sectors. These are significant sectors in terms of their economic value, so they are big parts of most investment portfolios.
Increased regulations may eventually impair profit margins, but won’t signal these companies’ ultimate demise. When it comes to climate risk, corporations in these sectors seem to be as focused on lobbying as they are on remedying — something that doesn’t sit well with their largest shareholders.
Stranded assets? Taking this a step further, some investors are looking at asset values for potential problems. In his June 2011 article for The Guardian (UK), Ben Caldecott (head of policy for Climate Change Capital) argues that the capital markets are potentially mispricing (overestimating) the value of these reserves. His argument is essentially this:
If the world can’t survive burning all of these fuels, then how can they all have value?
If these were small companies, the systemic risk to savers and investors would be similarly small. But the energy sector is significant, making up 12 percent of the S&P500, and some 25% of the FTSE (UK) indexes. The impact could be quite large.
It is perhaps not surprising that only subset of American companies are starting to tackle climate change. Industries that depend on the hydrocarbon status quo are not likely to address the remote probability that assets may be less valuable than they think. They see their money as better spent lobbying against carbon-limiting legislation.
So, for the time being, sustainable investors cheer baby steps — reduced carbon footprint, water intensity and waste products of their operations… However, when investors come to realize that adding reserves is a waste of shareholder funds, there will be a loud sound coming from the boardrooms.