The ABCs of CPP – W

W i

Evidence of the impact of climate risk can be found across all sectors of the economy, geographies, and seasons. In June 2018, a Standard & Poors Global Ratings report stated, in part:

“…The effect [of severe weather events] on corporate earnings is becoming more visible. There is growing demand among both equity and fixed-income investors for better reporting and disclosure of climate-related risks. As such, we expect that investors will focus even more on determining which companies, sectors, and geographies are most exposed to climate risks, and how management teams plan to manage such risks.”

The Canada Pension Plan Investment Board (CPPIB) needs to be among those investors planning for how they will manage these risks.

Climate risk is a surprisingly prevalent topic of discussion for the CEO’s of publically traded companies, and management teams are becoming increasingly accountable for understanding and mitigating the impact of climate risk. CEO’s and other top company executives often cite climate and weather as a risk factor beyond the control of management.

A recent (June 2018) report by S&P Global Ratings in collaboration with the Bermuda-based climate risk management specialist Resilience Economics set out to determine the prevalence and materiality of climate risk for companies in the S&P 500 index, for the financial year 2017.

Among their discoveries, they found that “Climate change will continue to increase the incidence and severity of both chronic and acute weather events, which could lead to a more material impact on companies’ earnings.” Of seventy-three S&P 500 companies surveyed, only eighteen companies (4%) had quantified the effects. For the companies who did, the average materiality on earnings was a significant 6%. In S&P Global Ratings’ view, the effect of climate risk and severe weather events on corporate earnings is meaningful. They go on to add: “If left unmitigated, the financial impact could increase over time as climate change makes disruptive weather events more frequent and severe.”

Quantifying and reporting climate risk has far-reaching consequences for companies. It is likely that we’ll see institutional investors build climate risk factors into their portfolio selection processes, thereby placing greater emphasis on climate when directing investments. S&P Global Ratings found that “…some of the largest global institutional investors hold meaningful stakes in the 708 companies that have disclosed a weather impact on earnings.” In addition, “Eleven companies disclosed a quarterly climate impact on earnings of more than $35 million in financial year 2017.”

The report cites Bloomberg Finance as its source for Examples of Climate Exposure. Eight sectors were assessed to determine the risks they may face from climate-related events. Some of their findings were:

Agriculture

  • Any one or a combination of drought , excessive rainfall, extreme heat or frost increases the risk of crop failure.

Renewable Energy

  • Seasonal and annual variability of wind speed, rain or stream flow introduce volatility into renewable energy generation.
  • Intermittent nature of wind causes mismatch between energy demand and supply in power markets with high wind capacity, which in turn leads to negative electricity prices and grid problems.
  • Extreme climate leads to construction delays for wind farm projects, onshore (due to high wind speed) and offshore (due to high wave height and wind speed).

Sports and Entertainment

  • Excessive rainfall or snow storm leads to event cancellation or disruption of access to event venues.

Mining

  • Extreme rainfall events cause mine floods or disrupt access to mine.

Retail

  • Unseasonable climate leads to reduced demand for seasonal products such as apparel.
  • Snow storm disrupts store operations (especially impactful during holiday sales periods).

Snow Removal

  • Fewer than normal snow events reduce demand for snow removal service.
  • Unexpectedly high number of snowstorms cause budget overruns for municipalities and building operators.

Construction

  • Sustained extreme cold or frost days impact winter construction activities, causing project delays.
  • Excessive rainfall causes work cancellation.

The report found that more companies are becoming vulnerable to climate change and severe weather events, but few are proactively mitigating the effects on both earnings and credit ratings. Under the sub-heading: “Climate-Related Factors Are Becoming More Significant In Our Credit Analysis”, S&P Global Ratings summarized: “…the increase in negative rating actions due to climate change risk signals that companies are being adversely affected by climate risk…climate issues are becoming increasingly important in terms of their influence on credit ratings.”