A big blind spot in the climate risk reporting debate is the unorganized sector, households, and governments.
3D Render of the clouds of Hurricane Ida (Aug 28, 2021) on a Topographic Map of the Gulf of Mexico. ... [+]
Has the SEC burned too much political capital pushing for climate risk disclosure in publicly listed firms when the adverse effects of climate change are likely to be felt in the “unorganized” sector, private firms, households, and the government?
Let me illustrate. In work in progress, my co-authors, Lisa Liu and Sonakshi Agarwal, at Columbia looked at severe weather events listed by FEMA (Federal Emergency Management Association) and the NOAA (National Oceanic and Atmospheric Administration). We did our best to geographically map the establishments of public companies such as offices, distribution centers and factories, within the path of the hurricane or the wildfire. We then looked for any kind of financial footprint in terms of stock prices, cash flows, sales, and earnings. By and large, we don’t find much. However, sales for private firms do seem to fall for affected companies. Granted, the quality of the data on sales of private companies is squishy. Despite the noisy nature of the data on private firms, it is somewhat remarkable that we find anything for private firms.
So what? If Brooklyn is shut for three days because of flooding, Amazon is unlikely to be affected by the physical risk aspect of climate action. The staff will work from home. Orders will be routed to the New Jersey distribution center. By and large, Amazon will be fine. It can buy insurance or self-insure at a reasonable cost. It has access to credit lines or even the capital market to raise financing. But, what about the sandwich shop in Brooklyn. They shut shop for three days and potentially lose the profit for the month. The sandwich shop does not have access to credit lines, insurance support and the managerial expertise of Amazon. And there are hundreds of such sandwich shops or small restaurants in Brooklyn. But are we measuring and reporting the impact of physical risk on the proverbial sandwich shop? Not really.
Where else will the impact of physical risk show up? Municipal and government balance sheets. Sales taxes for Brooklyn will fall somewhat if torrential rains shut the borough down for three days. For a more extreme example, the state of Florida has issued bonds for $600 million to effectively save insurers after Hurricane Ian. Are we as focused on getting municipalities and governments measuring and managing the losses and borrowing that will inevitably escalate in the future.
Something similar is at play with transition risk. The US EIA (Energy Information Administration) reports that in terms of number of wells, the share of U.S. oil and natural gas wells producing less than 15 BOE/d (barrels equivalent per day) stands at an astonishing 77% in 2022. When the energy transition comes, these 77% of wells are the ones most likely to go out of business. These wells, presumably not owned by the large publicly listed oil and gas companies, likely escape much of the attention related to climate risk reporting.
This is not to say that we need to abandon climate risk reporting at large public companies. It’s more of a call to understand whose balance sheets are more likely to be hit by climate risk and bring those affected but traditionally ignored actors, such as the unorganized sector, households, and governments into the public reporting arena.
