A new report by the S&P Global Ratings finds that climate risk and weather events are top topics among the CEOs of Publically Traded Companies.
S&P Global Ratings’s The Effects of Weather Events on Corporate Earnings Are Gathering Force report examined the earning calls’ transcripts and public corporate research updates for companies in the S&P 500 index during the 2017 financial year. They also analyzed earnings’ calls since 2006. The report discovered that weather and climate risk events are becoming such an important topic for publicly traded companies that CEOs are mentioning them at a higher percentage than other topics.
The S&P analysis observed that 15% of S&P 500 companies “publicly disclosed an effect on earnings from weather events,” but only 4% of companies actually quantified this effect. When companies did take the time to quantify the materiality of climate-related events on earnings, the average percentage was a significant 6%. This data exemplifies companies’ struggle to act on and quantify climate-related risks even as these risks become more costly, a topic we covered in our “Ready or Not: Are Companies Prepared for Climate-Related Risks and Opportunities?” article from April. In fact, S&P Global Ratings found that “CEOs and other top company executives often cite climate and weather as a risk factor beyond the control of management.”
The report showed that “weather & climate” were more popular during earnings’ calls than words such as “oil,” “dollar,” and “recession,” which signifies this topic’s relevancy in business today. S&P also reported that 87% of the mentions to climate risk factors occurred during earnings calls and the majority (89%) of weather-related disclosures in the 2017 financial year were unqualified. This could be an explanation as to why companies are hesitant to publish formal reports of weather-related effects on their bottom line.
S&P also noted that out of the nearly 9,000 research updates they analyzed, 43 cases were caused by climate factors and 65% of these cases caused a downgrade to the company’s rating. According to the report, “Two contributory factors [for these events] could be that more companies are becoming vulnerable to climate change and severe weather events, but few are proactively mitigating the effects on both earnings and credit ratings.” The report also predicted that more companies would report weather-related risks and opportunities as “management teams become more accountable for understanding the financial impact of weather events.”
While most companies are struggling or not attempting to quantify these risks and effects, the “Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (TCFD)...has outlined a set of recommendations for companies to produce climate-related financial risk disclosures for investors, lenders, insurers, and other stakeholders.” (See Table 2 below.)
Weather-related risks can be difficult to quantify and assess, but S&P Global Ratings’ report shows that these risks are becoming an increasing factor in companies’ evaluation. By implementing strategies proposed by TCFD, companies can be better equipped for future weather-related risks and opportunities.