by Felix Salmon
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About a decade ago, Miguel Torres planted 104
hectares of pinot noir grapes in the Spanish Pyrenees, 3,300 feet above sea
level. It’s cold up there and not much good for grapes—at least not these
days. But Torres, the head of one of Spain’s foremost wine families, knows that the climate is changing.
His company’s scientists reckon that the Rioja wine
region could be unviable within 40 to 70 years, as temperatures increase and
Europe’s wine belt moves north by up to 25 miles per decade. Other winemakers
are talking about growing grapes as far north as Scandinavia and southern
England.
Torres’ Pyrenees vineyards are a hedge and may
not be necessary. But if climate change redraws the map of Europe’s wine world,
he will be prepared. And his company will be one of a very few taking steps to
adapt to the future effects of climate change.
How companies are preparing for these changes is a
pressing topic, but when I agreed to write this piece I knew I was no expert. I
set out to educate myself by posting open requests on my finance blog at
Reuters, asking my eager-to-comment audience of business wonks to
tell me stories of how big corporations are getting ready.
The idea was that my readers and other bloggers
would cheerfully provide me with examples of how companies are preparing for
the downsides—not to mention the opportunities—of climate change. I braced
myself for the inevitable barrage of responses; what I got was a shocking lack
of evidence that the corporate sector is doing much of anything.
Most companies seem to focus solely on mitigating
changes to the climate: reducing carbon emissions, improving environmental
sustainability, and striving to be an enlightened steward of the planet.
Adaptation is the opposite, more pessimistic approach: It is about ensuring
survival in the exceedingly likely event that climate change occurs.
The U.S. government is trying to create
incentives for businesses and their investors to plan ahead. Newly issued SEC regulations mandate that any material risk
connected to climate change has to be revealed, in an attempt to bring these
issues out into the open and to allow investors to compare the ways that
companies see climate risks and adapt their strategies accordingly.
There are, to be sure, a few examples of
corporations that are treating climate change as an ominous reality, or even as
an opportunity. The biggest funders of Brazilian agricultural projects, state-owned
banks BNDES and Banco do Brasil, are looking carefully at whether it makes
sense to support projects which might not be viable in 20 or 30 years’ time. Agribusiness
giants like Cargill and Monsanto are developing hardier crops, global shipping firms
are planning for an ice-free Arctic passage [Clive link TK], and power company TransAlta
has scrapped potential new plants in the American West because it couldn’t
ensure that water rights would be available for the next 40 years.
But those are at the margins. In the mainstream
business world, climate change adaptation strategies are scant. The reasons for
inaction are sometimes simple, but also counter-intuitively complex.
Start with the superficial: Adaptation strategies
have essentially zero PR value. They
have nothing to do with saving the planet. Instead, they’re all about trying to
thrive if and when the planet starts to fall apart. That’s not something any
savvy company wants to trumpet to the world.
Then there is the mismatch of time horizons. Climate change takes place over decades,
and corporate timescales generally max out in the five to seven year range. Businesses
typically won’t spend significant money planning beyond that period, especially
because the effects on business models and future profitability are so
difficult to predict.
It’s easy to talk about how hotel companies with
coastal property might have to face more hurricanes, or rising sea levels. But
it’s quite hard to know what is going to happen to any given beachfront resort with
a sufficiently high degree of certainty.
Given the enormous amount of variability in any complex model, if a company
spent a lot of money carefully mitigating the risk of X, it could end up
getting blindsided by Y instead.
“There are very difficult models to develop,
with more rain here, less rain there,” says Andy Hoffman, associate director of
the Erb Institute for Global Sustainable Enterprise at the University of
Michigan.
Finally, even if the effects of climate change
are foreseeable, they can be impossible
to hedge.
Say you’re an electronics manufacturer who is
pretty sure that climate change is going to wallop Bolivia, resulting in political
unrest and a spike in the price of lithium. All your devices run on lithium
batteries, so this is a serious risk, but it’s far from obvious what you can do
about it. It’s silly to start stockpiling lithium, and you can’t even bet on
rising lithium prices 10 years from now, since it’s not a metal that is heavily
traded in the futures markets. Essentially all that you can do is be very clear
about the risk in your SEC filings, and go about your business as normal. And identifying
a risk is not the same thing as being able to negate it.
A classic business hedging strategy is to buy
insurance. Reinsurance companies have expensive and sophisticated
climate-change models. Pricing such risk is what they do. In many cases, they
will make more money as the effects of climate change become increasingly
visible and expensive, since they’ll simply raise premiums on everybody while
refusing to insure the most vulnerable at any price.
But insurance
doesn’t work very well as an adaptation strategy. Policies only last for
one year, or at most two. The insurance companies don’t need to charge higher
rates now if they see big and nasty things happening to the global climate in
20 years’ time—they can continue more or less as they are for the time
being. It’s easy to forget that if you’re simply renewing an insurance policy
every year: the existence of the insurance market gives companies a sense of
false security that their risks are hedged.
To put it another way, insurance is a highly
imperfect hedge for climate change, because it can go away or rise in cost very
suddenly. After the Bhopal disaster in 1984, pollution liability insurance
first disappeared entirely, and then, when it came back, cost ten times as
much. The risk of rising insurance costs—or insurance becoming impossible to
buy at any price—is something so inherently difficult to protect against, most
companies don’t even bother trying.
The behavioral economist Dan Ariely, author of “Predictably
Irrational,” likes to say that climate change is a problem that is perfectly designed to make people do
nothing: It happens far in the future; its effects will be felt most
greatly by other people; and the efforts of any one individual are minuscule.
Companies too tend to behave in predictably
irrational ways. Executives should try to imagine their companies 30 years down
the line, struggling with the deleterious effects of climate change on
profitability and corporate survival. But they don’t. That’s a job for the next
CEO’s successor’s successor. Right now there are a million other things that seem
much more urgent, starting with this quarter’s earnings.
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