Opinion

Felix Salmon

Climate Desk Bleg 2

Felix Salmon
Mar 17, 2010 22:11 UTC

Thanks partly to SXSW and partly to my own atrophied reporting muscles, my climate desk piece is going very slowly. And so I’m going to try another bleg here.

The basic situation is little changed from my last update: most of the companies I’m hearing about are either working on greenhouse gas emissions — which isn’t really the story I’m looking for — or else are just getting started on the work needed to comply with the new SEC reporting requirements. But I have heard, second-hand, of a few stories which are much closer to the mark, and if anybody can help me out in terms of finding me companies or websites which talk about these kind of things, I’d be very grateful.

First, there’s the banks. I heard of one Brazilian bank — I’m not sure which one — which was asked for a 20-year loan to fund a major agricultural project in the Amazon, and which responded by asking for an environmental audit. They don’t want to lend money to a coffee project, say, if the land is not going to be arable for coffee in 20 years’ time. Has anybody heard tales of environmental models playing a role in banks’ loan underwriting?

Secondly, there’s the hospitality industry, especially the parts of it which have a lot of assets on islands and beaches and the like. Are any of these companies doing environmental studies on coastal erosion and sea-level rise, and if so, how are they managing those risks? This isn’t a question of insuring against a disastrous event happening in the next year or two — that can be done by writing a check. It’s more a question of positioning the company so that it wouldn’t be devastated by the inability to insure against a disastrous event in the future, if insurers decide the risks are too big.

Finally there’s companies like ADM or Heinz, which are creating new crops designed to cope well with low-water conditions or large swings in temperatures. This is the point at which risk mitigation becomes profitable in and of itself: once you’ve mitigated risks by creating those crops, you can cash in on demand for those crops if and when climate change causes demand for them to rise.

Overall, though, I’m having difficulty finding big companies which are happy to spend a lot of money and effort on mitigating the effects of something as inherently nebulous and unpredictable as climate change. And maybe that’s rational. After all, if you prepare for X and then get blindsided by Y, you might as well have done nothing at all. And no one has any real idea of exactly what things are likely enough to worry about and what things aren’t.

COMMENT

Thought this may provide some data on this topic.

I enjoy your blog. Thanks for the good work.

http://siran.org/projects_s_and_p_report ing_comparison.php

Posted by CrookedShank | Report as abusive

Still looking for a climate-change strategy

Felix Salmon
Mar 11, 2010 19:37 UTC

Initial reaction to my Climate Desk bleg has been pretty interesting. I’m looking for companies which are taking a serious strategic look at managing the risks of climate change, and so far I haven’t really found any. The on-topic responses I have received have generally fallen into two categories: “look at the reinsurers”, and “look at us, we’re doing a great job reducing our carbon emissions”.

The carbon-emissions story is basically about positioning a company for present and future emissions regulation, as well as doing one’s part to try to prevent the worst excesses of climate change itself. But it doesn’t really help in terms of positioning a company for whatever effects of climate change do come.

As for the reinsurers, they are certainly looking a lot at climate change, especially insofar as they’re involved in catastrophe reinsurance: hurricanes, in particular, are associated with a rise in sea-surface temperatures. So as the global climate gets warmer, it makes sense for hurricane reinsurance premia to rise. I haven’t yet talked to any reinsurers directly, or even read their reports — if anybody has some useful links for me, I’d be eternally grateful. But outside of hurricanes, it seems that the effects of climate change on reinsurance rates are pretty small in areas like crop or life reinsurance.

More generally, pricing tail risks is what reinsurers do — it’s pretty much the core part of their job. When they look at the possible effects of climate change, they’re not making a strategic decision about the long-term future and structure of their business: they’re just pricing pretty short-term insurance contracts, like they’ve always done, using as much information as they have to guide them.

It’s important to remember, here, that reinsurance contracts are generally only a year or two in length — in that respect, reinsurers don’t really care all that much, when they’re pricing policies today, about what the global climate is going to look like in 30 years’ time. As and when climate change happens, reinsurers can react to it: if there are areas of the UK with lots of flood-insurance policies and sea levels start rising, for instance, there will be more than enough time for reinsurers to react by jacking up flood reinsurance rates or simply refusing to offer that product at all.

One other group of people has a long-term time horizon and is very alert to tail risks, and that’s institutional investors. To that end, a large group of buy-side firms, along with Mercer and the World Bank, has launched a climate change strategic asset allocation study designed “to identify potential new investment opportunities and possible future risks related to climate change”.

That’s a very good and worthy idea. But it does seem to me that risk management, when it comes to climate change, is best done at the corporate level, rather than at the shareholder level. If a big agricultural company risks running out of water, for instance, then it might make sense to be wary of its stock, or to worry about tail risks there. But it would make much more sense for the company itself to put in place a strategy for making sure that it will continue to be able to produce large amounts of food, even in the event that the environment in general, and local water access in particular, starts to deteriorate. That’s the kind of thing I’m really looking for, and that’s the kind of thing that so far I haven’t really found.

COMMENT

“signals that financial planning has a 5-7 year timeframe, that’s what it signals.”

Why does anybody bother to drill for oil then? I think you are avoiding the obvious conclusion.

Posted by Mr.Do | Report as abusive

The Climate Desk

Felix Salmon
Mar 10, 2010 04:09 UTC

I’m a little scared and more excited to kick off a serious and ambitious exercise in collaboration across a spectacular range of websites, including Center for Investigative Reporting, Grist, Mother Jones, Reuters, Slate, The Atlantic, Wired, and WNET. (Update: the Nation Institute is also involved.) It’s called The Climate Desk, and although its website isn’t up and running yet, it does have a mission statement:

The Climate Desk is a journalistic collaboration dedicated to exploring the impact — human, environmental, economic, political — of a changing climate.

My job is to look at the corporate side of things: whether and how big companies are preparing themselves for the downside of climate change. Already the SEC has decreed that companies have to disclose the effect of climate change in four different areas: actual and potential laws and legislation; international accords and treaties; regulatory and business trends, including changes in demand for goods with high or low emissions; and, finally, this:

Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

Of course, disclosing risks is a very different thing to actually doing something about them. So what I want to have a look at is two main questions: how should companies be managing their climate-change risks, and how are they managing their climate-change risks?

Some companies (like property insurers in coastal regions) I suspect are already reasonably sophisticated about these matters. Others, of course, simply aren’t set up to think deeply about long-term strategy regarding risks which will unfold over decades; it would be silly for most small tech start-ups to waste management time on that kind of thing. But I suspect there are some very interesting and surprising stories out there which are worth exploring: when, for instance, does an asset start to look more like a liability?

If the public sector can do this — the Pentagon has, unsurprisingly, already started thinking along these lines — then the private sector should be able to do so as well.

Helping me out in looking at all this will be a group of great bloggers and journalists, including Alexis Madrigal of Wired, David Roberts of Grist, Mark Schapiro of CIR, Kevin Drum and Kate Sheppard of MoJo, and Nicole Allan of The Atlantic. But I want your help too: email me on felix at felixsalmon.com with your ideas, and I’m even welcoming PR pitches on this one.
There are two things I don’t want. I’m not interested in the green-tech story, or in companies which are trying to position themselves to benefit somehow from climate change. I really want to focus on the way that companies are managing downside risks, here, as much as possible.

And I’m absolutely not interested in having a debate about whether climate change is real, or anthropogenic, or overhyped, or anything along those lines. If you think that the downside risks of climate change are zero, then that’s a different story, not this one.

Eventually I’m going to write this all up in a self-contained piece. But right now, I’m starting at zero. Help me out here!

COMMENT

Several years ago I did some research on the re-insurance industries take on climate change. I focused on Swiss RE and Munich RE. I was suprised to learn that they both had depts. dedicated to the issue and were contemplating the possibility of refusing to insure CEO’s that put stock values at risk by ignoring the necessary changes required by a changing climate. Their websites have changed over the years and much of the detailed research may no longer be available but these links should provide some insight into what corporate interests are taking steps to begin mitigation.

http://www.munichre.com/en/ts/climate_ch ange_and_insurance/strategy_and_policy/d efault.aspx

http://www.theclimategroup.org/programs/ the-climate-principles/

Posted by Greensleeves | Report as abusive
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