Reporting the Financial Risks of Climate Change

Financial institutions are increasingly aware that climate change may mean large, even catastrophic, money losses. Above, an aerial scene from near Panama City, Fla., on Oct. 11, 2018, in the aftermath of Hurricane Michael. Photo: Glenn Fawcett/U.S. Customs and Border Protection. Click to enlarge.

TipSheet: Reporting the Financial Risks of Climate Change

By Joseph A. Davis

In the old days, you could count on climate change deniers to warn that doing something about global warming would wreck the economy. Today, the tables have turned. Shrewd advisers now caution investors that the risk to the economy is climate change itself.

The topic of climate risk offers lots of possible stories for environmental journalists, depending on region, audience and platform. Here are some dimensions of this emerging story, along with some tools for covering it.

 

Why it matters

Unmitigated climate change will certainly harm the welfare of millions … nay, billions of people worldwide. Don’t take our word for it. Much of the news from 2018 and 2019 centered on reverberations from several major reports saying so.

Take, for example, the special report on “Global Warming of 1.5 ºC” from the United Nations-based Intergovernmental Panel on Climate Change. Based on the best science available, the report painted a grim picture. 

Left uncontrolled, climate change will bring extreme heat waves in most inhabited regions, along with heavy precipitation and likely drought. It will bring sea level rise that will last for millenia. Concluded the report: “Risks to health, livelihoods, food security, water supply, human security, and economic growth are projected to increase.”

 

If climate change is not addressed, 

the U.S. economy could shrink by 

10 percent by the end of the century.

 

Also see the “Fourth National Climate Assessment,” an interagency compendium that focused on the United States, which made equally frightening predictions (may require subscription). Among them: If climate change is not addressed, the U.S. economy could shrink by 10 percent by the end of the century.  

 

The backstory

The economy has been a bugaboo in discussion of climate for decades. 

Those opposed to climate action, which is often equated with less burning of fossil fuels like coal and less petroleum-based transportation, said climate action would wreck the economy. Their argument was based on the shaky premise that coal jobs and gasoline engines were the whole of the U.S. economy. 

The locus of these arguments has been “free-market” and anti-regulatory think tanks, for example the Heritage Foundation and the Competitive Enterprise Institute, often funded (may require subscription) at least partly by fossil fuel industry donors.

President Donald Trump, who withdrew the United States from the 2015 Paris climate agreement, took that view in an Associated Press interview. “What I’m not willing to do,” Trump said in the 2018 interview, “is sacrifice the economic well-being of our country for something that nobody really knows.”

Of course, many economists say that’s baloney.

Economists (may require subscription) and green-industry leaders for decades have been arguing that green energy industries would create even more jobs than would be lost — erecting wind turbines and installing solar panels, etc. 

Since 2018, moreover, a newly energized wave of youth groups has agitated with great effect for a Green New Deal economy that would both address climate change and generate jobs.

 

What’s ahead

What’s new and trending this year is a growing awareness in important financial institutions that climate change confronts businesses with large, even catastrophic, money losses. 

Witness, for just one example, the bankruptcy (may require subscription) of the behemoth California utility PG&E following California wildfires. Nobody understands this better than the insurance (and reinsurance) companies, which are limiting their exposure to climate-related catastrophes like wildfires, hurricanes and flooding.

To companies, the risks may look different than they do to homeowners. For instance, the value of most oil companies depends heavily on the rights they own to proven reserves. If climate-related problems make it increasingly hard for them to pump this oil, they have what are called “stranded assets” — well-fields worth nothing and that become write-offs. 

Or look at all the coal companies. A great many have gone bankrupt in recent years, even politically powerful ones like Murray Energy (which practically wrote a big part of the Trump administration’s environmental deregulation agenda). 

These coal bankruptcies happen for many complex reasons (not just environmental regulation) — including the inability to compete in the market with cheaper gas and renewables. Institutional investors are shedding their coal holdings, not because protesters are chanting outside, but because they do not want to lose money. Certainly, the need for climate action amplifies this risk.

By the way, U.S. law requires public companies, those whose stock is sold on the open market, to disclose basic information about their financial well-being (assets and liabilities) to stockholders and the public. The Securities and Exchange Commission, or SEC, administers these requirements through a complex array of disclosure regulations. 

The disclosure rules are far more than we can explain here, but key themes are regular public reports and financial transparency (the words “regular public reports” should make reporters’ ears perk up).

The SEC has been criticized for not being stringent enough in enforcing disclosure of environmental risks. What’s new in recent years is that (in addition to the SEC) investors themselves, especially large institutional investors like pension funds, are calling more loudly (subscription required) for disclosure of climate risk.

Journalists can help. In fact, there is a whole generation of lawsuits from environmental groups, states, etc., seeking redress for companies’ failure to disclose. Read about them in publications like Climate Liability News and InsideClimate News.

 

Story ideas

• What are the companies of interest to your region or audience? Are particular companies heavy users of fossil fuels or heavy emitters of global warming gases like carbon dioxide? Which employ the most people or generate the most secondary economic activity?
• What might be some climate-related perils to the industries you focus on? Floods? Drought? Heatwaves? Hurricanes? Wildfires? Sea level rise?
• What remedies or adaptations might be possible to avoid such perils? Flood-control structures? Zoning and building code changes? Re-engineering of products and energy sources?
• What are the financial risks to the companies involved, the banks and investors who finance them, their insurance providers and the surrounding communities? Can these be quantified and monetized?
• Are the financial risks conscientiously estimated and fully disclosed? To journalists? The public? Regulatory bodies? The stockholders?

 

Reporting tools

• SEC filings: Regardless of SEC rules, most big companies file annual reports, if only as a PR exercise. Other required reports come quarterly. An important gateway to this world of financial information is the SEC’s EDGAR system. It’s online and searchable, and links to a lot of information on what’s in it and how to use it.
• Company stockholder meetings: These are quasi-public, although checking in with the company (or even buying a share of stock) might help get you in.
• Consultants and analysts: There are whole worlds of investment analysts who make a living knowing what you want to know. Yes, it’s a jungle. You may do better with larger, established firms that specialize in the area (like environmental and climate risk) that you are interested in.  
• The financial press: Get access to publications like the Wall Street Journal or the Financial Times. Work their search engines.
• Other sources: Don’t forget to talk to the companies in question, as well as the climate action groups that work on this topic.

Joseph A. Davis is a freelance writer/editor in Washington, D.C. who has been writing about the environment since 1976. He writes SEJournal Online's TipSheet and Reporter's Toolbox columns. Davis also directs SEJ's WatchDog Project and writes WatchDog Tipsheet, and compiles SEJ's daily news headlines, EJToday.

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* From the weekly news magazine SEJournal Online, Vol. 5, No. 6. Content from each new issue of SEJournal Online is available to the public via the SEJournal Online main page. Subscribe to the e-newsletter here. And see past issues of the SEJournal archived here.