The Next Economy
Lack of US Climate Policy Putting Companies at Risk; Investors Demand Action

As a record number of global investors calls on governments to accelerate action on climate change, a new CDP analysis shows that some of the largest US-based corporations view climate change as an increasing risk to their bottom line and reputation among consumers and investors.

The new State by state: An analysis of U.S. companies and cities across seven states report, released today, highlights business readiness for a low-carbon transition and reveals major climate-related risks, but also opportunities facing their operations. The analysis is a follow-up to the ‘U.S. State by State 2014’ report surveying similar companies — including Google, McDonald’s, United Airlines, John Deere, Goodyear, eBay and Sears. The research demonstrates best practice, how companies are successfully managing risks and building resiliency, and unique paths for companies and investors to take part in the transformational change; and reveals a growing awareness of climate-related policies, as well as an understanding for the various drivers of increased risk perception and value creation.

As the US economy faces significant perils from unabated climate change, more companies are reporting environmental risks, financial implications of these extreme weather events and how they go about seizing new opportunities. State by State presents findings from the past four years about US corporate reactions to the impacts of climate change upon business in four US regions, with emphasis on Texas, Florida, Arizona, Colorado, California, Ohio and Illinois.

Highlights include:

• 88 percent of US real estate companies cited operational risks related to hurricanes, flooding, storm surges, sea level rise, which could translate into higher costs to businesses;
• 2017 Atlantic hurricane season ranks as one of the costliest disaster years for the insurance industry — $215bn, including a record uninsured loss roughly amounting to $120bn; insurance companies Allstate and American International Group are managing risk by adjusting pricing and terminating coverage in areas prone to natural disasters;
• California companies reported in 2017 more opportunities from environmental regulation than companies headquartered in any other state, 81 percent of Californian companies disclosing inherent benefits to their business from climate-related regulation;
• In 2017, over half of Californian companies pointed to corporate reputation and changing consumer behaviors as drivers of business opportunities, with 69 percent reporting either or both drivers in their responses to CDP; Google parent company Alphabet recognized reputational benefits in the form of potential brand equity gains amounting to at least $133 million from addressing climate change risks;
• In 2017, companies in the Southwest operating within the Colorado River Basin have reported more than 70 serious water risks to their operations and more than 70 percent of these risks were linked to expectations of higher operating costs and plant disruption. One of the world’s largest defense contractors, Raytheon, reported that 11-20 percent of its global revenue could be affected by water risk;
• Climate presents a risk to the ice cream industry, which contributes more than $39bn to the national economy. Unilever’s dairy facility in the Western seaboard — producing brands such as Breyers, Ben & Jerrys, Klondike, and Good Humor — could likely see disruptions in production if water levels continue to drop in Lake Mead;
• Ohio-based companies have consistently reported fuel and energy regulation as a top risk since 2015. With over five million customers across 11 states, including Texas, West Virginia, Virginia, Louisiana and Kentucky, American Electric Power is one example of a company grappling with uncertainty around the regulatory direction of the US

Due to the increasing concern about climate risk, US companies are stepping up on climate change at a pace never before seen. Driven by wind and solar sector growth, US investments in US renewable energy exceeded $40 billion in 2017 and cumulative US private investment in renewable energy could reach $1 trillion in the near future.

"A climate of policy uncertainty in the US is a distraction for companies and cities that see the problem of climate change and want to be focused on handling these costly and material risks,” said Sara Law, VP of Global Initiatives at CDP. “The good news is CDP's data shows that these real economy participants have remained committed to action, bracing for impact despite distractions.”

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Meanwhile, as protesters disrupt the Trump administration’s tone-deaf attempt to promote fossil fuels at the COP 24 climate conference, currently taking place in Poland, a record number of investors have joined the companies, cities and states calling upon the government to take bold climate action. Earlier this week, 415 global investors, with $32 trillion in assets under management, are behind the call to action as signatories of the 2018 Global Investor Statement to Governments on Climate Change.

The Statement — the single largest policy intervention from investors on climate change to date — asks governments to strengthen their Nationally Determined Contributions to meet the goals of the Paris Agreement and to enact policies to facilitate the world’s transition to a low-carbon economy.

Three overarching priorities are highlighted in the Statement for global leaders to address:

• achieving the Paris Agreement’s goals;
• accelerating private sector investment into the low-carbon transition, and
• committing to improve climate-related financial reporting.

Additional detail is provided in an accompanying briefing paper also shared with leaders. Among specific policies, the investors request governments “phase out thermal coal power,” “put a meaningful price on carbon” and “phase out fossil fuel subsidies.”

Investors highlight the “ambition gap” the UN has determined exists between governments’ commitments and what is needed to deliver on the goals of the Paris Agreement — to limit global warming to well below 2°C — and ensuring the necessary transition to a low-carbon economy. They stress their “great concern” about the gap, noting consequences of an otherwise “unacceptably high temperature increase” and “substantial negative economic impacts.”

Without greater action, Schroders — a signatory to the Statement — projects long-run temperature rises of around 4°C, with $23 trillion of associated global economic losses over the next 80 years. This is permanent economic damage three or four times the scale of the impacts of the 2008 Global Financial Crisis, while continuing to escalate.

Investors signing the Statement include some of the world’s largest pension funds, asset managers and insurance companies, alongside faith-based groups, state treasurers and comptrollers, impact investors and venture capital funds. The signatories assert: “The global shift to clean energy is underway, but much more needs to be done by governments to accelerate the low carbon transition and to improve the resilience of our economy, society and the financial system to climate risks.”

The intervention comes as findings of a recent UN report show that nations must triple their efforts to meet their commitments under the Paris Agreement. Only weeks earlier, the IPCC’s 1.5°C Special Report showed that considerable additional emission reductions are achievable, delivering significant benefit to society and the climate.

A strong agreement by governments at COP24 is important in setting rules for how the Paris Agreement will be implemented. It also provides an opportunity for governments to signal how they will jointly step up efforts to cut emissions, reducing associated impacts and the costs of climate change. The process for governments to increase ambition of their climate commitments is built into the design of the Paris Agreement, with investors calling on governments to start the process this year.

The Global Investor Statement is one of the actions of The Investor Agenda, launched at the Global Climate Action Summit in September, which calls on investors to step up action on climate change. It provides a way for investors to directly report actions they are taking on climate change, and scale up their commitment to act, across four key focus areas: Investment, Corporate Engagement, Investor Disclosure and Policy Advocacy; the ‘Global Investor Statement’ falls under the latter.

Regarding the investors’ call for the phase out of coal power worldwide, this includes welcoming growing support for the global Powering Past Coal Alliance. Launched in 2017 by the UK and Canada, the Alliance now has 28 national government signatories, alongside other sub-national and corporate supporters, including nine US states.

New York State Comptroller Thomas P. DiNapoli of the New York State Common Retirement Fund, responsible for a $207 billion pension fund, explains: “Despite the misguided policies of the Trump Administration, global efforts to address the very real threat climate risk presents to the economy, financial markets and investment returns are ongoing. At New York State Common Retirement Fund, we are still in and remain committed to supporting the Paris Agreement's climate goals. The transition to a low-carbon economy presents numerous opportunities to create value, and investors who ignore the changing world do so at their own peril.”

DiNapoli's recent announcement of an additional $3 billion commitment to the pension fund's Sustainable Investment Program raised the program's value to more than $10 billion.

Peter Damgaard Jensen, Chair of the Institutional Investors Group on Climate Change and CEO of PKA, a Danish pension fund with $41 billion in assets, adds: “There is no place for coal in the clean energy future that is essential to addressing climate change. It’s therefore encouraging to see ever more countries set necessary dates for the phase out of coal. Investors, including PKA, are moving out of coal in their droves, given its devastating effects on the climate and public health, compounded by its poor financial performance.”