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Written by: Thomas Kostigen
The power outages in Texas due to extreme weather have brought to the fore climate-related risks and disasters. Investors should take note.
Climate-related risks are poised to increase even more as more people are deprived of resources—from energy to food—and stress supply chains and infrastructure. Climate-related risks cost the global economy $100 billion annually from extreme weather alone; by 2100 the costs of climate impact are expected to reach $2 trillion annually.
Larry Fink, the chief executive of the world’s largest money manager, BlackRock, recently said that all companies in the firm’s portfolios must be net zero by 2050. In other words, they must be accountable for negating their carbon emissions. Otherwise, these companies face divestiture.
This “stick” approach to reducing climate risks places the onus on corporations. It forces them to comply or suffer financially. However, investors can suffer, too.
If a mammoth investor such as BlackRock pulls its investment from a company, that company’s shares are likely to decline in value. So if you own those shares directly, or even indirectly through another mutual fund or your 401(k) plan, you lose value, too.
Verisk Maplecroft, a London-based risk consultancy, has developed an open sourced set of analytics that anyone can use to asses risk by a number of factors, including climate change. The company provides ongoing advisory analysis of climate change vulnerability and risk assessments.
A good financial advisor can also help guide you through the risk maze when it comes to how exposed a company might be to climate-related disasters. Location is only part of the analysis. Supply chain risk is also important. if a company, say, imports its parts from someplace that is impacted by extreme weather, its manufacturing capabilities are hurt and, of course, sales fall. That eventually affects the company’s profitability and share price. Many computer makers found this out the hard way when floods ravaged southeast Asia, where their parts are produced. Without parts, the computer companies were forced to trim sales projections. Wall Street noticed and analysts pulled back on recommendations for the sector. This is known as the “weather effect” and more companies are beginning to see the value in advanced forecasting. It’s part of the reason why IBM purchased the data side of the Weather Company (which powers the Weather Channel). And its why Oracle has made a big push into farming and agricultural data.
Extreme weather has its physical costs—the costs of rebuilding, repairing and restarting. These costs are widely chronicled. But the financial market costs of weather and climate-related disasters needs more transparent accounting. The power outage in Texas is just the latest example of an event that poses a threat accelerator to the local economy and the companies in it.
Climate related risks should become an overlay as important as any other risk factor for investors to consider. Investors and advisors need to start assessing the companies they buy (and sell) by this measure. If extreme weather created by climate change continues on its upward trajectory, more companies may be put at risk. Which ones are what you need to know.
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Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.