About the Author:
Helen Mou is a graduate from Brown University with degrees in Environmental Studies & Economics. While at Brown, she co-founded the Sustainability Consulting Partnership and co-managed the Brown Socially Responsible Investment Fund. As a 2009 Clean Air-Cool Planet Climate Fellow, she authored this paper while being a Sustainability Intern at Pax World Management Fund, examining the potential affect of climate risk and regulation on investment. Currently, she is working as an Analyst at The Avascent Group, a boutique strategy and management consulting firm in Washington D.C.
Introduction
The impacts of climate change on the economy extend far beyond massive physical shifts in the conditions of the natural environment. First-order physical impacts, such as severe weather events, sea-level rise, average temperature increase, and changes in the health environment have important second- and third-order implications for all sectors of the economy. These impacts will vary across sectors, industry groups, and individual companies. They will also vary across geographical location, not just because of physical location but also because of varying political and legal landscapes and local economic and cultural conditions. Responses to these specific impacts are increasingly relevant to long-term growth prospects and, therefore, to investors.
This report focuses on small- and mid-cap companies, which already tend to disclose fewer climate change-related business risks than larger ones. Larger companies with international operations may have already been required to address certain climate risks because they are subject to more stringent national directives, while smaller companies may not have felt this pressure as powerfully. Larger companies also tend to have a deeper environmental footprint than smaller companies, and because of this, often face a greater social mandate to improve performance on climate change and environmental issues.
Asset managers compare small and mid-cap companies to peers of similar size and in the same sector and industry in order to more accurately benchmark these companies relative to their competitors. Examining the business risks of climate change will shed light on future leaders and laggards, and identify specific areas for improvement and opportunity in a low-carbon business climate. Comparative data on how companies are addressing climate risks and opportunities may, therefore, benefit investors as well as consumers, governments, and companies themselves. This report seeks to clarify those risks and opportunities in an effort to inform better decision-making and more effective engagement on the part of investors.
Here, ThinktoSustain.com presents the Executive Summary of the report…
Executive Summary
The impacts of climate change on the economy will extend far beyond shifts in the conditions of the natural environment. These changes will eventually affect every business, no matter their size and no matter their physical location. The immediacy and amount of impact will vary across sectors and geographical locations but small to mid-cap businesses are at greater risk of losing the confidence of investors, of falling behind financially in a dramatically altered marketplace, and of being unprepared for the major environmental and financial reporting and regulatory changes.
A collaboration between Pax World Investments and Clean Air-Cool Planet, “Risk and Opportunity in a Low-Carbon Business Climate” is the first study to examine the state of disclosure of climate-related risks and opportunities among the Russell 2000 Index of small- to mid-cap companies. The research encompassed 364 companies that represented the top 50 percent of the market capitalization of the Russell 2000 as of June 5, 2009.
As investors grow increasingly interested in how companies evaluate and manage the risks and opportunities in the emerging low-carbon business climate, how these companies confront and plan for the changing economic and environmental landscape could be a determining factor in their long-term viability. Why is this important to the growing number of investors interested in sustainability? A company’s approach to climate risk is indicative of its management quality and long-term growth potential. While the business risks due to climate change are myriad, four specific issues that stand out are – litigation and regulatory risk, physical risk, competitive risk, and reputational risk.
Indicators
The study focuses on eight indicators (regulatory risk, energy prices, weather and natural disasters, physical risk, climate change, emissions reporting, sustainability reports & initiatives, and climate-friendly products & services), reflecting a range of climate risk disclosure. The disclosure indicators show the depth and breadth of disclosure and non-disclosure, uncovering a disclosure gap by a majority of these companies.
The sectors that are more likely to address climate risks are those that are disproportionately vulnerable to regulatory risk, which tend to be large emitters, but climate change presents risks that will affect far more companies than simply large emitters. To the extent that regulatory risk makes companies more conscious of other climate-related risks, many small companies are unaware of the full landscape of climate risk, and certainly have given their investors no assurance that they have such awareness. Yet some have begun to disclose information about their emissions, risks and opportunities resulting from climate change, and the more that do, the more pressure builds on those that have no such disclosure.
