Climate Change: Business Risks and Opportunities

MARKETING RISKS

• Stranded assetsInvestments in buildings, infrastructure, machinery or processes that are GHG-intense (ie have high emissions), may result in assets that become unusable (or extremely costly to modify or upgrade) under future carbon constraints/regulation.
• Changing demand patternsWith the increase in awareness of energy efficiency, climate change and other environmental impacts, companies and communities proactively addressing these issues in their product and service offerings are well positioned to capture market opportunities.
• License to operateIncreasing attention to how companies are addressing their climate change impacts will affect their ongoing license to operate. Investors are increasingly concerned with how companies are managing their GHG risks.
• Competitive advantageWith some sectors and regions already facing GHG regulation, companies with lower GHG emissions intensity will have a competitive advantage over those who do not.
• Rising costsCosts associated with energy, transportation and material procurement (activities with significant GHG emissions) are on the rise as a result of recent and coming GHG regulatio.
• Reputation (protection and enhancement)As the SEC notes: “Depending on the nature of … business and its sensitivity to public opinion, [an organization] may have to consider whether the public’s perception of any publicly available data relating to its greenhouse gas emissions could expose it to potential adverse consequences to its business operations or financial condition resulting from reputational damage.” Civic groups tend to target organizations that are least prepared to demonstrate their progress in addressing pressing issues of societal concern, such as climate change, while companies making efforts to bolster their efforts in this arena are increasingly seeing reputation enhancement such as being recognized by external raters as having strong corporate social responsibility programs eg the Corporate Reputation and Social Responsibility Rankings. Further, reputation risks may arise from the use of unsubstantiated green claims, and as a result the FTC has proposed revisions to its Green Guides, which outline what environmental marketing claims companies can make with respect to their products and services. Understanding these risks and opportunities are imperative for long term brand protection and enhancement.

REGULATORY / LEGISLATIVE RISKS

• Cap and TradeWhile the short term likelihood of federal cap and trade or carbon taxation legislation is slim, with utilities and business groups such as BICEP (Businesses for Innovative Climate and Energy Policy), legislation is likely in the medium term. Preparing for this will be key for business success. Further, the State of California is implementing its Cap and Trade program for certain entities to be effective in 2012. 
• Emissions limitsWhile emissions limits have not yet been enacted, large stationary sources of GHGs are now required to obtain permits to emit GHGs under the Clean Air Act (specifically, the tailoring rule). The permits must demonstrate the use of best available control technologies (BACT) and present real business risks, particularly for large emitters and their customers.
• Price on carbonAs regulatory requirements on GHG emissions increase (for example those associated with the California state GHG reporting fees (2011); EPA’s GHG permitting requirements; EPA mandatory GHG reporting; and regional cap and trade programs; organizations will face increasing costs associated with carbon management and the results will be rising prices for high GHG intense products and services.
• Decentralized carbon regulation approachWithout a federal program regulating carbon, three regional programs have emerged to date . Each regional program presents additional risks and business expenses associated with having to respond to different programs in different territories. For example, one of these regional approaches, the Western Climate Initiative (WCI) has scheduled its economy-wide cap-and-trade program to take effect on January 1, 2012. It will apply to emissions from electricity generation, industrial sources, transportation, and residential and industrial fuel combustion.
• Reporting requirementsIn 2010 the Securities and Exchange Commission issued a guidance clarifying that publicly traded companies must disclose their material climate change risks in SEC filings. Additionally, the EPA has mandatory reporting requirements for large emitters with reporting deadlines beginning 3/31/11.
• Possible future EPA regulation, beyond new vehicle emissions standards, mandatory reporting and large stationary source permitting requirements (the tailoring rule) noted above, also present regulatory risks for organizations.
  
   

PHYSICAL RISKS

• Facility locationRisks associated with increased frequency and intensity of severe weather, including storms and flooding, as well as risks associated with sea level rise.   For example the SEC notes “climate change-related physical changes and hazards to coastal property can pose credit risks for banks whose borrowers are located in at-risk areas,” while the direct risks are carried by those organizations owning the physical facilities.  
• Resource availabilityCompanies may be dependent on suppliers that are impacted by climate change and that may affect their access to resources.  For example, companies that purchase agricultural products from farms adversely affected by droughts or floods, or that obtain materials, such as water, directly from their own resources (reservoirs, wells etc.), will face resource risks associated with climate change.
• Supply chain disruptionsShort and long term disruption risks associated with severe weather and resource availability.