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Climate Risk - The implications for investors and businesses

Climate Risk - Hurricane on the U.S. East Coast
Climate Risk - Hurricane on the U.S. East Coast
From hurricanes.wikia.com

A relatively new economic concept called Climate Risk is being incorporated into general risk management practices. Climate Risk refers to the minimization of the financial risks of climate change by transitioning to a clean energy future. When we talk about financial risks due to climate change, we also refer to the opportunities it brings. Climate Risk isn’t only about environmental implications, but it also presents economic considerations, including physical risks, regulatory risks, and the financial consequences associated with each company.

For example, extreme weather events like Superstorm Sandy, floods, hurricanes, etc. can force businesses to stop operating. Floods can damage facilities and equipment. Further, extreme weather conditions may bring hotter temperatures and require more cooling for machines and data centers, for production processes, and for the workers. Severe droughts and floods disrupt operations and supply chains and damage infrastructure and property. The implications for investors and businesses are potentially profound.

In 2010 the government’s Securities and Exchange Commission (SEC) issued ground-breaking guidance called “The SEC Interpretive Guidance on climate change disclosure”, which requires companies to 'Disclosure of Material Climate Change Risks and Opportunities'. There is increasing evidence of the potentially critical financial consequences of climate change across a wide range of sectors. The SEC’s guidelines cover three major areas: regulatory risks—both domestic and international, indirect effects of regulation or business trends, and physical impacts of climate change.

Ceres, a non-profit advocacy organization for sustainability leadership, issued a report and analysis called “Cool Response: The SEC & Corporate Climate Change Reporting”. Ceres’s reporting is based on a survey of more than 40,000 surveyed companies in the last four years, and an analysis of the state of S&P 500 companies reporting on climate disclosure through the end of 2013. It found that the majority of financial reporting on climate change is too brief and largely superficial, and that most companies are failing to meet SEC requirements. Ceres points that “investors want greater transparency on the business risks of climate change as a means to protect and increase shareholder value” (According to Ceres President Mindy Lubber). However, most U.S. Companies (scoured from the annual reports of about 3900 businesses) have been ignoring SEC’s disclosure requirements of climate risks, where only twenty-seven percent of publicly traded companies include 'climate change' in their annual reports. Ceres included recommendations for SEC, since it’s not stepping up to adequately enforce the requirements it set in 2010.

In early 2014, the New York Times reported on the United Nations study about climate change that conditions have grown critical and the risk of severe economic disruption is rising. With today’s technological solutions, if we wait 15+ years to address climate action and fail to limit carbon emissions, the issues may be impossible to solve. The U.N. study found that, if we don’t act now, greenhouse gases (GHG) in the atmosphere would threaten the livability conditions of the planet in the future, resulting in extensive global economic disruption and the need for expensive scaleable new solutions (which don’t exist today).

The report states that nations and their governments are still heavily subsidize fossil fuels than investing in accelerating the shift to cleaner energy. For example, governments continue to invest in coal-based power plants, which cause a long-term climate risk.

Our societies will not be able to limit the risks of climate change without investing seriously in clean energy. The renewable energy projects can presents a big wave in the future. As with all investments, risk tolerance and the horizon are the major factors in funding prospects.

Some investment options for enthusiastic individuals are crowdsourcing, renewable energy bonds, Clean Energy Funds, and individual stocks focused entirely on renewables or electric transportation. Today, ‘green’ bonds amount to over $ 9 billion. The WilderHill Clean Energy Fund tracks the Wilderhill Clean Energy Index that tracks specific U.S.-traded renewable energy companies.

For example, Tesla Motors in Fremont, California. Tesla has revolutionized the car in Silicon Valley and beyond. Today, Tesla’s market share is nearing $21 billion, pushing away the established competing auto makers. Tesla finds constantly new markets, the company advances offerings, keeps introducing new business models, and is aiming to become more economically viable to more socio-economic communities.

ADDITIONAL INFORMATION

1. The Securities and Exchange Commission (SEC) website and “The SEC Interpretive Guidance on climate change disclosure”: http://www.sec.gov/

2. Ceres, founded in 1989 by a group of investors, is an advocacy organization for sustainability leadership and includes a network of investors, companies and public interest groups to accelerate and expand the adoption of sustainable business practices and solutions to build a healthy global economy: http://www.ceres.org/

3. Ceres’s “Cool Response: The SEC & Corporate Climate Change Reporting”:
http://www.ceres.org/resources/reports/cool-response-the-sec-corporate-c...

4. Download the Ceres report Fact Sheet: http://www.ceres.org/files/investor-files/sec-guidance-fact-sheet

5. United Nations study and the NY Times assessment: http://www.nytimes.com/2014/01/17/science/earth/un-says-lag-in-confronti...