The Role of the Corporate Sector in the Era of Climate Change — Alex Sadler

13 min readApr 26, 2019

If you have been following the news on PG&E’s recent bankruptcy, you will have noticed that the company cited significant increases in wildfire risk from climate change as one of their reasons for filing bankruptcy after being blamed for sparking the deadly 2018 Camp Fire.[i] PG&E estimated that tens of millions of trees in their service territory have been killed by increasingly hot and dry conditions as well as bark beetle infestations, which are a recognized outcome of climate change in the region. These dead trees are a wildfire hazard, because if they fall on utility transmission lines, they are likely to spark a fire. While the utility has a responsibility to remove hazardous vegetation, the scale of dead and dying trees caused by global warming is becoming increasingly unmanageable.

PG&E’s bankruptcy has been labeled the first ‘climate change bankruptcy’ and there will surely be many more to come. The costs of this collapse are widespread: shareholders lost over $20 billion, insurers will face enormous payouts for the damage caused, customers will be required to pay increasing rates for electricity, creditors will not receive what they are owed, and taxpayers will bear some of the disaster relief costs.[ii]

We can only expect that such crises will become increasingly common as the climate continues to change. The UN’s Intergovernmental Panel on Climate Change (IPCC) reported in 2018 that we have already reached 1°C of global warming about pre-industrial levels, which has resulted in drought, sea level rise, increased frequency of extreme weather events and numerous other detrimental outcomes. If we move now to drastically reduce our emissions trajectory, we have the potential to halt global warming and lessen its expected impacts. If we continue on our current pathway, however, the IPCC predicts that we will reach warming of 1.5°C between 2030 and 2052, at which point the damage to the climate is deemed irreversible. Extreme weather events will occur more frequently and with greater intensity, sea level rise will inundate coastal communities and watersheds, and droughts and wildfires will increase in frequency beyond current levels.

While it is still possible to limit global warming to 1.5°C or less, achieving that goal would require immediate and comprehensive shifts in the way we produce and consume energy, as well as to our land use, urban infrastructure, and industrial systems.[iii] Unfortunately, we as a society are failing to make the kind of immediate and systemic change required to stem the worst impacts of climate change.

Why is it that we fail to act, when we can see the crisis looming in front of us? I believe the answer stems from a lack of understanding. Both a lack of understanding of the damage that will be inflicted by climate change now and in the future, and a lack of understanding of the best course forward.

The corporate sector will be an essential part of any solution to climate change, so it is especially important that corporations understand both the impacts of climate change on their business — so as to inspire a sense of urgency — as well as how they will fit into the solution. This post aims to highlight both the impacts and pathways forward for the corporate sector in the hope that we can collectively take action to mitigate and adapt to our changing climate.

How will climate change impact the corporate sector?

We are already seeing substantial and measurable impacts of climate change on the corporate sector. PG&E is merely one example of how global warming will impact the bottom lines of companies across all industries.

Picture the disruption caused to supply chains by extreme weather events; the insurance payouts and repair costs after a natural disaster; the salination of fresh water used as an input for products caused by rising sea levels; the crop losses caused by hotter temperatures and drought. No industry will escape the impacts of a changing climate, although some may feel the effects worse than others. The oil & gas industry and utility companies in particular are anticipated to bear the highest burden of climate impacts.

One study found that if the market accounted for the true physical risks of climate change to corporate assets, the total market value of over 11,000 globally listed companies would fall by 2–3%, with some companies losing nearly a fifth of their value. [i]

The German reinsurance company Munich Re estimated that in 2018 alone, the global economy suffered $160 billion worth of damage from natural disasters and extreme weather events. These numbers are only expected to increase with further global warming.[ii]

In the US specifically, the most recent National Climate Assessment predicts future economic losses of $500 billion per year if immediate action is not taken to stem climate change.[iii]

In addition to the physical losses that companies are anticipated to face as a result of climate change, corporations also face ratings risk. Investment research companies such as Morningstar are beginning to rate investments and funds based on their sustainability ratings, which means that a company’s impact on the environment may soon play a part in institutional and retail investment decisions. This suggests a potential increase in long-term cost of capital for companies performing poorly on this front.[iv]

Given these statistics, one would expect that companies are taking urgent action to understand the future costs of climate change for their business and protect themselves from the worst of the effects. Unfortunately, that is not always the case.

Are companies aware of the impacts of climate change?

Studies show that large companies are increasingly acknowledging the potential impacts of climate change on their business. The Center for Climate and Energy Solutions (C2ES) conducted a study in 2013 of the S&P Global 100 Index companies and found that 90% of them identify extreme weather and climate change as current or future risks to their business, across all industry sectors.[v] 38 of the companies reported that they have already experienced the impacts of climate change, and a further 17 expected that they would be adversely impacted within the next 5 years. Reduction or disruption in production capacity (e.g. power outage or shortage of key inputs) and increased operational costs (e.g. due to higher costs for key supplies or backup power) were listed as the top expected impacts.

The World Economic Forum also found that extreme weather, migration caused by climate change and natural disasters were the three risks business leaders said they were most likely to face in 2019.[i]

What are companies doing about it?

Companies are evidently aware of the potential impacts of climate change upon their business. So, the real question is: what are they doing to address this, and are their current actions sufficient to create the level of systemic change required to turn things around?

It starts with Corporate Social Responsibility (CSR).

In today’s corporate environment, dedicated CSR teams are a standard in most large corporations. These teams exist in part out of genuine commitment to the common good, and in part to promote a positive pubic reputation and avoid potential government regulation by voluntarily self-regulating things like human rights and social impact.

While CSR programs have historically focused less on environmental concerns, the increased visibility of climate change in public discourse and consumer and investor pressure is driving companies to present themselves as caring about environmental issues such as climate change.

This can take the form of shallow, PR-oriented shifts in rhetoric, such as British Petroleum’s $7 billion rebranding effort in the early 2000s. The company sought to reorient themselves from being perceived as a traditional oil company to presenting themselves as environmentally-aware by changing their logo to represent a sun and relabeling themselves ‘Beyond Petroleum’.

BP did make some efforts to conduct more meaningful change, such as investing in renewable energy, but their climate-oriented efforts are largely regarded as surface-level.

CSR efforts to address climate change are not merely limited to PR campaigns, however. In recent years, companies have taken steps to actively acknowledge their role in producing emissions that harm the planet, as well as seeking to play a role in mitigating those impacts.

Voluntary reporting of carbon emissions to the Carbon Disclosure Project (CDP) and including emissions footprints in annual reports is becoming a more mainstream activity. Additionally, some companies are taking the extra step to counteract their harmful emissions with carbon reduction activities and other environmentally-friendly initiatives. Lyft, IKEA and UPS are prominent examples of large corporations who have set CSR objectives to reach net neutrality (i.e. to balance carbon emissions with carbon reduction activities) and annually report on their progress towards those goals.

Companies with existing CSR platforms should follow the example of these firms and seek to both report on and counterbalance their carbon emissions. Such actions have the potential not only to enhance the public image of these companies in the eyes of consumers and investors, but also positions them to take an active part in mitigating the potential future impacts of climate change. Companies that choose not to take decisive action to counter their emissions are, in effect, making the choice to pursue a pathway towards warming of 1.5°C.

Beyond CSR.

Certainly, these voluntary CSR programs are an important step in shifting the corporate landscape to be oriented more towards climate change awareness and mitigation. However, CSR efforts alone will not offer the transformative change that is required to turn things around. Climate change will drastically impact companies’ bottom lines, and it is time they started acting like it.

Where do we go from here?

There are four key steps that the corporate sector should take to ensure that they are aligned to the kind of urgent and systemic change required to both mitigate and adapt to climate change.

First, companies need to understand the impact of climate change on their business and acknowledge the urgent need for change. Second, companies must act to prevent further global warming. Third, companies must act to prevent impacts to their bottom lines — and, by extension, to the general economy — by building resilience. Fourth, companies should work with governmental bodies to build a broader platform for change.

1. Assess vulnerabilities

Unfortunately, while corporations are increasingly acknowledging climate-related risk, the majority of them are not formally taking these risks into account in their financial filings and risk planning activities, which prevents them from making meaningful change beyond their CSR programs. This is primarily due to a lack of understanding about the nature of the risks of climate change. The C2ES study found that the S&P Global 100 companies “describe the risks as relatively minimal, too distant in time to be of concern, too difficult to quantify, or too uncertain to support business decisions directed specifically at improving their resilience.”

The traditional approach to risk assessment relies on past weather patterns as a prediction for future impacts. This is no longer an accurate portrayal of risk, now that the climate is becoming increasingly volatile and extreme. In part to protect their own future profits and in part to accurately report to the public their true risk profile, companies must start to incorporate sophisticated climate modeling into their risk assessment processes.

Some corporations are leading the way on this. For example, Shell is employing advisers to conduct assessments of future climate conditions in order to consider the impact of sea-ice, wave conditions and tropical cyclones on their business.[i] As mentioned earlier, Exxon already performs its own climate risk analysis. Interestingly, climate assessments can also reveal new opportunities, such as opening trading routes in the melting Arctic. This should not be the primary motivator for performing assessments; however, the profit incentives may entice hesitant companies to complete these essential activities.

Once these risks are analyzed, the results should be made public so that the market accurately reflects a company’s true risk. Companies are obliged to report ‘material’ threats to the market, and climate change evidently poses material risks to assets and infrastructure. If climate risks are not disclosed to the market, companies may face a similar situation to PG&E, in which climate-related liabilities were recognized only after the damage had already occurred.

Voluntary guidelines for assessing and disclosing climate vulnerabilities were established by global regulators on the Financial Stability Board in 2017. The corporate sector should seek to implement these across the board.

Some countries are turning to mandatory reporting of climate risk, which may facilitate a more coordinated and expedient move towards widespread climate risk reporting. Some degree of mandatory climate-related reporting has been established in the majority of G20 countries; however, these standards are oriented more towards emissions than risks.[ii] France took the lead in 2015 by becoming the first country to pass a law introducing extensive mandatory climate-related reporting for publicly traded companies, including the requirement to report physical risks.[iii]

Once companies are able to quantify the risks that climate change poses to their current and future business, this will instill in them a greater urgency in achieving steps 2 and 3: mitigating and adapting to climate change.

2. Act to prevent further global warming

The corporate sector is an essential actor in preventing further global warming.

This is in part because of its historical responsibility for the carbon emissions that have caused the current crisis. According to a recent NY Times report, “if you include all the carbon extracted and supplied, just 90 companies are responsible for two-thirds of all the greenhouse gases emitted between 1751 and 2016,” with the majority of these emissions occurring since the 1980s. This would indicate that there continue to be some key corporations that contribute substantially to continued global warming. It is essential that these large emitters recognize that their business decisions today will have an enormous impact on our planet tomorrow, and that they make changes to their business models to orient themselves towards climate-friendly operations.

While moral imperatives may be insufficient to prompt meaningful action, investors are increasingly pressuring these large emitters to invest in greener technology, such as renewable energy. Recent years have witnessed a shift in this direction, with companies such as Shell and Chevron investing in wind and solar power and battery technologies. These efforts should be commended and expanded. However, to avoid continued warming, these companies must match this green investment with corresponding decreases in fossil fuel emissions, which currently is not the reality.

At the same time as we encourage high-emitting companies to lower their carbon footprint, we as a sector should be encouraging the expansion of climate-friendly industries. The Green Tech industry in particular offers promising signs that investing in our climate’s future can also bring us a substantial return on investment.

3. Act to build resilience

In addition to acting to prevent further global warming, the corporate sector must act to prevent the worst impacts of climate change from impacting their bottom lines, both now and in the future. Their ability to do so will have broader impacts on our global economy.

This can take the form of physical activities, for example building flood barriers around key sites and reinforcing roofs. Insurers estimate that a dollar spent on proactive measures such as these saves five dollars spent on reconstruction. Companies likes Colgate-Palmolive are leading the charge by closing, relocating or strengthening sites that are exposed to high climate-related risk.[iv]

Resilience can also take the form of developing emergency preparedness plans to mitigate the indirect impacts of climate change, such as employees’ ability to get to work during extreme weather or on the availability of raw materials. A preparedness plan might involve, for example, identifying backup sources for materials and arranging for alternative transportation. Goldman Sachs emerged out of Hurricane Sandy as one of the only buildings in downtown Manhattan to remain lit up and without flooding because they had prepared for the disaster by sand-bagging the building and investing in a back-up generator. They are an excellent example of the fact that investing time and money in comprehensive emergency preparedness planning prevents future expenditures on repairs and enables business to continue in the face of a natural disaster.[v]

4. Collaborate to build a platform for change

While individual actions by corporations are important, companies cannot act in a vacuum. It is essential that the corporate sector works collaboratively with the public sector to build a broader platform to both mitigate climate change and prepare for its adverse impacts.

The corporate sector has long used its influence to pressure the government for lax climate regulation and even subsidies of fossil fuel emissions. It is time that companies switch their focus and push for meaningful change to ensure that we do not meet or exceed the 1.5°C threshold and that we are ready as a country and global community to face the inevitable outcomes of climate change. This will require corporations to collaborate with the government to establish long-term, comprehensive policy frameworks and strategies that support climate mitigation and adaption activities.

Climate change is so frequently in the news and yet so easily dismissible. We know what is coming and yet we fail to make the urgent and systemic changes that are required because the worst impacts feel too far removed to prompt our action.

Greta Thunberg, a 16-year-old teenager from Sweden, has made headlines recently for her school strike to protest global inaction on climate change. Greta has repeatedly pointed to the injustice that global leaders are stealing the future from younger generations by refusing to take urgent action to prevent climate change. Greta challenges the global community with her demand that

“We cannot solve a crisis without treating it as a crisis…if solutions within the system are so impossible to find, then… we should change the system itself.”

We in the corporate sector must decide whether to continue on our current pathway towards 1.5°C of global warming, or to respond to Greta’s call to action. I hope we will make the latter choice.

[i] https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/short-termism-and-the-threat-from-climate-change

[ii] https://www.cdsb.net/sites/default/files/climate-disclosure-standards-board-climate-disclosure.pdf

[iii] http://427mt.com/2017/01/16/impact-french-law-article-173/

[iv] https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/short-termism-and-the-threat-from-climate-change

[v] https://www.economist.com/business/2012/11/10/making-it-through-the-storm

[i] https://www.cnn.com/2019/01/25/business/climate-change-davos/index.html

[i] https://www.economist.com/leaders/2019/02/21/climate-change-and-the-threat-to-companies

[ii] https://www.munichre.com/en/media-relations/publications/press-releases/2019/2019-01-08-press-release/index.html

[iii] https://go.forrester.com/blogs/business-risks-of-climate-change-infographic/

[iv] https://www.morningstar.com/company/esg-investing?cid=RED_ESG0001

[v] https://www.c2es.org/document/weathering-the-storm-building-business-resilience-to-climate-change-2/

[i] https://www.economist.com/leaders/2019/02/21/climate-change-and-the-threat-to-companies