Earlier this week, the investing giant BlackRock sent a letter to companies it invests in announcing a shift in its philosophy, placing an emphasis on properly evaluating financial risks from climate change.
“Our investment conviction is that sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors,” BlackRock CEO Larry Fink wrote in the letter.
BlackRock is now asking companies it invests in to disclose climate related risks, adding that without the disclosures it will assume companies aren’t adequately managing those risks.
The announcement from BlackRock — a major institutional investor in many of Williamson County’s public companies — could put pressure on local companies to measure and report climate risk.
Despite evidence that climate change could increase the frequency of severe weather events, only a few companies in Williamson County specifically mention climate change in regulatory filings. More make references to the damaging effects of extreme weather, but don’t connect that to climate change.
Mark Abkowitz, a professor of civil and environmental engineering at Vanderbilt who has studied the threats that climate change poses to businesses and public infrastructure, said companies would be wise to start monitoring climate risks.
“(Companies) think of climate as something that's slowly rolling along decade by decade, which for most businesses is way behind their time frame for trying to be successful" he said. "Businesses would do well to understand that they have a climate risk issue because it spawns extreme weather."
Abkowitz said the companies most likely to lose money because of climate change are those located in high hazard areas, such as hurricane-prone coastal Florida or locations in California in the path of wildfires.
The Franklin hospital business Community Health Systems operates about a dozen hospitals in coastal Florida. In 2017, CHS reported that hurricanes Irma and Harvey forced evacuations and disruptions at a number of hospitals, costing the company $40 million in lost revenue and damages.
CHS acknowledged the risk of hurricanes in its 2017 annual report, but didn’t make a connection to climate change. The 2018 annual report didn’t mention hurricanes or climate change.
The Brentwood-based senior living company Brookdale reported in 2017 that wildfires in California affected nearly a third of its 61 communities in the state, including six communities that had to be evacuated. Fires in 2019 forced more evacuations.
Wildfires in California and hurricanes in Florida and Texas cost Brookdale $1.9 million in operating costs during the fourth quarter of 2017.
In its most recent annual report, Brookdale notes the geographic concentration of its communities in California, Florida and Texas could put the company at risk if there are natural disasters or economic downturns in those areas. The only mention of climate change is the risk that new regulations on greenhouse gas emissions could increase the cost of ding business.
BlackRock is a major institutional investor in both CHS and Brookdale. Representatives from those companies declined to answer questions about how they monitor or plan to report climate risks.
The direct impacts on company assets pose a highly visible threat, but Abkowitz also warned that companies should think about risks to their supply chains.
“(Businesses) also could be impacted substantially by the ability to get people and products in and out of where they need to go,” he said. “Even if you think that you are relatively immune to some of these things, you still have to think through where do you source your stuff, where do you distribute your stuff.”
That’s particularly important for retailers with stores all over the U.S., such as Brentwood-based Tractor Supply.
Tractor Supply’s business is highly dependent on the weather. The company has to get cold-weather items from its distribution centers to northern stores before freezing weather arrives, and has to make sure Southeastern stores are well stocked before hurricane season.
Abkowitz said increasing temperatures or flooding caused by climate change could damage roads, bridges and other pieces of infrastructure companies need to move their products.
“If Memphis floods for example. That's a major distribution area, and there will be more significant flooding in Memphis because it's kind of a bathtub for the Mississippi,” he said. “Then all of a sudden you can't use FedEx or you can't use the railroads because many of them logistically hub there.”
Tractor Supply’s 2018 annual report repeatedly stresses the influence of extreme weather on financial results. The company notes that snow storms, hurricanes and heavy rain can increase demand for products needed to cope with weather conditions, but could also slow sales by shutting down stores.
Weather has such a strong impact that Tractor Supply encourages investors to evaluate its financial performance in six month periods rather than the typical three month periods to account for variation in weather patterns. Still the company never mentions climate change in its most recent annual report.
BlackRock is Tractor Supply’s second largest institutional investor. A representative from Tractor Supply said it’s too early to tell if BlackRock’s shift in investment philosophy will change how Tractor Supply reports climate risks and declined to answer questions about how the company currently evaluates those risks.
The only public company is Williamson County that extensively addresses financial risks related to climate change in regulatory filings is the Brentwood oil company Delek.
Perhaps unsurprisingly, the company outlines in detail the risk that new governmental regulations aimed at reducing greenhouse gas emissions could cut into the company’s profits.
Several other companies —including Brookdale and Kirkland’s — mention this type of regulatory risk, but Delek seems to be the only public company that explicitly describes the threat that climate change poses to the company’s physical assets.
“Many members of the scientific community believe that climate changes are occurring that could have significant physical effects, such as increased frequency and severity of storms, droughts and floods and other climatic events,” the company noted in its 2018 annual report. “If any such effects were to occur, they could have an adverse effect on our assets and operations.”
The company points out that its refining business is particularly vulnerable to disruptions — climate-induced or otherwise — because its refineries are concentrated in four locations in in Louisiana, Texas and Arkansas.
Delek didn’t respond to questions about how it monitors risks from climate change.
While he encourages businesses to take actions to prepare for climate change, Abkowitz said determining the best way to respond to risks posed by climate change will be different for every business depending on their risk tolerance and financial resources.
Huge companies might be able to absorb costs associated with rising sea levels and more severe weather. Smaller companies might recognize the risk, but may not have the resources to respond. In all cases he said it’s useful to evaluate risks, so leaders can make the best decision.
He suggested looking for a sweet spot that balances the risks of climate change with the costs of adapting to a new climate. While adapting to climate change certainly has a cost, Abkowitz also framed it as an opportunity.
“Every risk is an opportunity ... What's happening with climate and extreme weather doesn't have to be, oh my God, the sky is falling,” he said. “If (companies) are aware and proactive and doing things that seem sensible, then that gives them a competitive advantage.”