One study last year found that accounting for physical risks to corporate assets would shave 2-3% off the total market value of over 11,000 globally listed firms. That is less than many stocks move in a given day, and a fraction of the estimated 15% downward effect of a transition to cleaner energy. Unlike the energy transition, though, some physical harm to corporate assets is all but guaranteed. Not only that, but the risks rise as the world warms. And the average conceals a huge range. Some companies would lose nearly one-fifth of their enterprise value. Most have no clue where they stand.
They have few pressing incentives to find out. Markets tend to punish honesty about previously unacknowledged risks, not reward it. Rather than learn that nature poses a “material” threat—which firms are obliged to disclose to shareholders—it is safer not to look in the first place. Although credit-raters and insurers are busily reassessing climate risk, companies’ premiums and credit have scarcely got more expensive. On the rare occasion markets do reprice a company’s risk, they do so in a hurry. PG&E, a Californian utility, was forced into bankruptcy protection in January after insurers and creditors fled when they concluded that it could be on the hook for billion-dollar liabilities over its possible role in sparking wildfires.
Such cases would be rarer if companies were legally obliged to assess and disclose their climate vulnerabilities. An international group set up by the Financial Stability Board, a global set of regulators, issued voluntary guidelines for public companies in 2017. These should be made mandatory.
It is in businesses’ long-term interest to own up to the threats they face. A post-disaster payout from a cheap insurance policy is better than nothing—but a lot worse than avoiding disruption. Adaptation could mean erecting flood barriers around factories or battening down warehouse roofs to withstand stronger gales. Insurers reckon a dollar spent on such measures saves five in reconstruction. It may involve lobbying politicians to fill the estimated $110bn-280bn shortfall in annual public spending on resilience. In extreme cases, it may require retreat from a business. If this lays bare the seriousness of global warming’s effects, the world may even get serious about tackling its causes.