7 Ways Climate Change Affects Companies

It's not a new idea that climate change will have an impact on businesses as much as on any other aspect of our lives. In fact, "Climate Change as Systemic Financial Risk" even served as the topic of a keynote address to regulators by Securities and Exchange Commissioner Allison Herren Lee at the end of 2020.

The Securities and Exchange Commission (SEC) is not exactly at the center of U.S. environmental policy. Nonetheless, since 2010 the SEC has required public companies to disclose to their shareholders any issues related to climate change that could have a significant impact on their business operations.

Those regulations, and U.S. environmental policy in general, are very much the subject of upcoming change with the Biden administration making it a matter of key legislation, especially in 2022.

Biden's ambitious domestic agenda known as "Build Back Better" is currently part of the broader Inflation Reduction Act of 2022, which includes $300 billion earmarked for reducing carbon emissions and promoting clean energy. That legislation was approved by Congress and signed into law by President Biden on Aug. 16, 2022.

Key Takeaways

  • Changing weather patterns may pose the most dramatic risk to businesses large and small.
  • Emission control systems can be so expensive that public companies are required to report them as business costs.
  • Cap and trade programs are in effect in many countries and at least 11 U.S. states.
  • Climate change alters consumer behavior, to the detriment of some businesses and the benefit of others.

The Issues Worth Disclosing

Nevertheless, the issues that the SEC finds worth disclosing are a good indicator of the risk factors to businesses that climate change poses. The SEC's guidance outlines a number of factors that companies should consider. Below are seven of the most significant.

Get perspective on quantifying the investing risks of climate change with The Green Investor podcast, episode 1.

Capital Expenditures for Emission Control Systems

Some companies have been required to spend significant amounts of money on upgrades to polluting facilities and on the installation of emission control systems in order to comply with regulations on greenhouse gas emissions.

The businesses hit most by these requirements are energy and utility companies that operate refineries and power plants.

Cap and Trade Rules

Cap-and-trade policies aim to lower carbon emissions by placing an upper limit on the amount of pollution a company can emit and allowing companies to sell any of their unused allowances to other companies.

Though many countries have introduced such programs, cap-and-trade policies have a checkered history in the U.S.

The state of California has its own program, one of the world's first and biggest, with mixed results. California's program is criticized for allowing the biggest and richest corporations to get away with business as usual, or even pollute more, while banking pollution allowances are bought from other companies.

On the other hand, 10 northeastern states have formed their own regional cap-and-trade consortium. However, the last federal proposal on cap-and-trade died in the U.S. Congress during the Obama administration.

Higher Prices for Goods and Services

Even companies that aren't in the energy industry can be indirectly affected by energy regulation and the costs they create.

Broad changes in prices for utilities and transportation must be passed on by suppliers. And the companies in the middle must pass them on to their customers.

Changing Weather Patterns

The SEC's 2010 report notes that climate change is expected to change weather patterns throughout the world. That reality has since been reiterated by many other sources, including the United Nations, the National Aeronautics and Space Administration (NASA), and the American Meteorological Society.

Storms are expected to become more severe, with a variety of negative consequences for businesses. These could spread well beyond the obvious losses for insurance companies.

International shipping could become more dangerous. Long-established agricultural regions could be decimated. Coastal communities and infrastructure could suffer repeatedly.

Changing Demand for Goods

The combination of changing prices and changing weather patterns create changes in demand for certain goods. Demand for cold-weather products such as heating oil and ski equipment might decline.

Then again, new opportunities are being created for environmentally-friendly corporations. Companies like Patagonia, Seventh Generation, and Dr. Bronner's have all found success by catering to consumers who make environmentally-conscious choices when they shop.

Obligations Under Foreign Regulations

Many, if not most, large public companies operate abroad as well as at home these days, and that places them under the jurisdiction of a wide range of climate change laws and regulations, whether or not the U.S. has adopted them.

For instance, the U.S. withdrew from the Paris Agreement on climate change in 2017, but 200 other nations are part of that agreement. Some are envisioning a global cap and trade system as a successor to the Kyoto Treaty, which expired in 2012.

American corporations are subject to those laws when they do business abroad.

Changing Public Perceptions

Reputation is supremely important to businesses and, these days, many want to earn reputations for environmental responsibility.

BP is one company that has invested heavily in this trend with its "Beyond Petroleum" campaign. The company has also invested billions in renewable energy projects to prove its sincerity.

"Going green" is, increasingly, good business. Salesforce, Nike, Apple, and Disney are among the corporations that have recently announced major environmental programs.

Article Sources
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  1. U.S. Securities and Exchange Commission. "Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation."

  2. U.S. Securities and Exchange Commission. "Commission Guidance Regarding Disclosure Related to Climate Change."

  3. The White House. "Fact Sheet: The Inflation Reduction Act."

  4. Smithsonian Magazine. "The Political History of Cap and Trade."

  5. Pro Publica. "Cap and Trade Is Supposed to Solve Climate Change, but Oil and Gas Company Emissions Are Up."

  6. United Nations. "Climate Action: The Science."

  7. NASA. "Global Climate Change: Vital Signs of the Planet."

  8. The American Meteorological Society. "State of the Climate."

  9. Grow Ensemble. "Environmentally Friendly Companies: 10 of Our Favorite Planet-Friendly Businesses."

  10. Green and Blue Tomorrow. "10 Green Companies with Amazing Environmental Initiatives."

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