Storm clouds forming in the current economic environment pose numerous risks to equity markets, but investors obsessing over the gloomy economic outlook may be overlooking an important risk originating from the physical environment—the impact of climate change. Extreme weather events, including hurricanes, tornadoes and floods, have the potential to physically disrupt company operations and supply chains across the globe, and such events are on the rise. “We’re steadily moving toward a new normal where billion-dollar disasters are a regular occurrence,” Emilie Mazzacurati, founder and CEO of market intelligence firm Four Twenty Seven, told Barron’s.
Four Twenty Seven compiles data on climate and corporate facilities, which it then uses to compute a score that ranks companies according to their vulnerability to extreme weather and climate change. The scoring system decomposes a company’s total risk into three separate components: operations risk, market risk, and chain risk.
10 Stocks Facing Biggest Climate Change Risk
(Total Score Based on Market, Operations, and Supply Chain Risk)
- Norwegian Cruise Line Holdings (NCLH); Total Score = 100
- Western Digital (WDC); Total Score = 89.2
- NextEra Energy (NEE); Total Score = 86.5
- Micron Technology (MU); Total Score = 80.2
- Eastman Chemical (EMN); Total Score = 80
- Consolidated Edison (ED); Total Score = 79.6
- Seagate Technology (STX); Total Score = 77.7
- Merck (MRK); Total Score = 76.9
- Applied Materials (AMAT); Total Score = 76.3
- Public Service Enterprise Group (PEG); Total Score = 74.6
Source: Four Twenty Seven; Barron’s.
What It Means for Investors
Consolidated Edison taking up the sixth spot received a total score of 79.6. The utility firm was given a score of 49.7 for the operating risk component, which comprises about 70% of each company’s total score, attempts to measure the risks posed by extreme weather events anywhere from the frequency and extremity of heat waves to sea level rise and hurricanes. ConEd is particularly vulnerable to rising sea levels with facilities in New York City, and faces other water- and heat-related stresses with its facilities in California and southern Texas.
The other 30% of the score is represented by market risk and chain risk, for which Con Ed received a score of 38.4 and 70.1 respectively. The first gauges the vulnerability to climate risk of a company’s end market while the latter accounts for climate risk associated with countries likely to comprise part of a company’s supply chain.
Hurricane Sandy that hit New York City in 2012 and flooded the metropolis’ subway and surrounding suburbs is one instance where ConEd suffered the effects of extreme weather. The utility company’s distribution network was damaged and service to 1.4 million customers was interrupted, with costs topping $460 million.
Because methods for measuring climate change risk are still in their infancy, investors should pay close attention to how they are used and whether they accurately reflect a company’s vulnerability. Picking stocks and predicting the weather have always involved a bit of guesswork, but now the two are interrelated more than ever.