Beyond Quarterly Earnings: Preparing the Business Community for Long-term Climate Risks

Abstract:

The business community stands to be highly impacted by climate change. In both short and long-term timescales, climate change presents material and financial risks to companies in diverse economic sectors. How the private sector accounts for long-term risks while making short-term decisions about operations is a complex challenge. Companies are accountable to shareholders and must report performance to them on a quarterly basis. At the same time, company investors are exposed to long-term climate-related risks and face losses if companies fail to prepare for climate impacts.

The US Securities and Exchange Commission (SEC) obligates publicly traded companies to discuss risks that might materially affect their business and since 2010, the agency recommends that companies consider and discuss any significant risks to their business from climate change. Some companies have complied with this guidance and comprehensively analyze potential climate change impacts, yet others fail to consider climate change at all. Such omissions leave companies without plans for addressing future risks and expose investors and the public to potential catastrophic events from climate change impacts.

Climate risk projections can inform companies about the vulnerability of their facilities, supply chains, transportation pathways, and other assets. Such projections can help put climate-related risks in terms of material costs for companies and their investors. Focusing on the vulnerability of coastal facilities, we will use climate change impact projections to demonstrate the economic impacts of climate change faced by the private sector. These risks are then compared to company disclosures to the SEC to assess the degree to which companies have considered their vulnerability to climate change. Finally, we will discuss ways that companies can better assess and manage long-term climate risks.