In 1988 Roger Sant and his company Applied Energy Services (now just AES) were building small coal-fired power plants around the U.S. Roger would have preferred to build wind, but there was no way to make that work economically. So he set out with the help of the World Resources Institute to do the first carbon offsets. That may have been the first entry of business into tackling climate change. It was just a few years before major U.S. utilities, anticipating that the U.S. would be regulating GHG emissions in the foreseeable future and that electric utilities would be the first target, followed suit.
When companies started thinking about climate change almost 30 years ago, they faced a relatively stable decision-making environment. Companies assumed that any emissions reduction mandates would be modest and inexpensive, so they did not see climate change as a significant policy risk. The first climate risk assessment by a major coal-fired utility concluded that climate policy was not even a material business risk. Even as recently as 2003, a 200-page stock offering from Peabody Coal dismissed the prospect of material climate policy risk in a single paragraph. Climate change itself — its impacts seen as decades away — rarely factored into business or investor decision-making.
Fast forward to today’s decision-making context:
- Major advances in climate science. Climate science can now attribute extreme events and changing environmental trends to climate change with much more specificity. Models are able to generate climate forecasts at scaled-down resolutions much more suitable for impact assessment and decision-making. The implications of tipping points like an ice-free arctic are better understood.
- Climate change has made its entrance. Numerous manifestations of climate change are now visible, in many cases decades earlier than anticipated. These impacts include rapidly declining arctic ice and higher estimates of potential sea level rise this century (from early forecasts of little more than 3 feet to more than 10 feet today).
- A stronger societal case for mitigation. As a result of widespread technology innovation, the costs of mitigating climate change are seen today as much lower than anticipated even 10-15 years ago. Both the direct and indirect implications of climate change are also generating considerably more concern among the national security and other communities.
- Even greater policy uncertainty. Few observers 20 years ago would have thought it possible that the U.S. would not have a coordinated climate policy in place long before 2017. Climate change is now so politicized, however, that radical uncertainty prevails regarding the form and timing of national climate policy outcomes. As climate change itself becomes ever more obvious, the possibility of a dramatic national policy respond cannot be ignored. In the meantime, widely varying state and local climate initiatives will create even more investor uncertainty and risk.
- Expanded expectations. Much more is expected from companies and investors today than just a few years ago. Companies are expected to know their carbon footprints, have emissions reduction targets, and disclose climate risks. Companies are under increasing pressure to set internal carbon prices, purchase or construct their own renewable energy generation, treat responses to climate change impacts as a fiduciary responsibility, and perhaps even divest fossil fuel stock holdings.
None of this makes business climate change decision-making or climate risk-based investing any easier, especially when relatively few companies have accounted for these big shifts in their climate risk and opportunity decision-making. A big part of the challenge is that the physical risk profiles of individual companies can differ vastly from one to the next, even within the same industry sector. Companies operate in different geographic regions, with different supply chains and varying climate change vulnerabilities. Policy risk profiles also vary widely based on different sensitivities to policy (and potentially even litigation) outcomes. There is no one-size-fits-all anything when it comes to business climate risk and opportunity.
This all creates a decision-making environment in which getting access to the right information is critical for robust risk and opportunity-based decision-making. I explore the issue of accessing actionable climate knowledge in another post.