Climate Change Is Coming to a Balance Sheet Near You


Just as some argue the inevitability of global warming, key policymakers and business leaders say financial statement disclosures around climate change will eventually become a reality for CFOs in the U.S.

“We believe climate risk should be taken into account by every business and by every investor when planning for the future,” said former hedge fund manager Thomas F. Steyer. “To solve climate change we need to change the spreadsheet of American business when doing those calculations.”

Steyer made his comments during the unveiling Tuesday in New York of a new study issued by Risky Business Project, a group of business, political and academic leaders focused “on quantifying and publicizing the economic risks from the impacts of a changing climate” according to its website.

The study argues a number of startling economic outcomes surrounding climate change, including the fact that between $66 billion and $106 billion worth of existing coastal property will likely be below sea level nationwide by 2050, labor productivity of outdoor workers (those in such as construction, utility maintenance and agriculture) could be reduced by as much as 3 percent, and there could be a 50 to 70 percent loss in average annual crop yields as the climate becomes warmer.

 

The result, the study concludes, is that U.S. companies need to prepare their balance sheets for the coming climate crisis.

 

“Although climate change is not financial in nature, it is still a very significant threat to our economy and the the threat of the climate bubble is more cruel and more perverse than the [2008 financial crisis],” said former U.S. Treasury Secretary Henry Paulson. “And unlike the financial crisis, there is no possibility of the government coming in and preventing the worst outcomes.”

To that end, many on the Tuesday panel argued public companies should be required to disclose climate change impacts in financial disclosures in very specific ways to warn investors.

“[Potential climate change effects] should be included in the requirements around the disclosure of materiality,” said former Treasury Secretary Robert Rubin. “What are the [carbon] emissions that you will be held accountable for some day, what are the assets that could be stranded [by climate change] someday and what are effects of climate change on your business. If business have to disclose that, it will become an impetus for business to act.”

 

Paulson added that given the urgency of the climate change debate, investors and regulators should consider for pushing for disclosure changes now. “There is a role for investors, and perhaps the [U.S. Securities and Exchange Commission] should be requiring disclosures,” he said “There are a number of ways to create urgency.”

 

Former New York City Mayor Michael Bloomberg -- co-chair of the Risky Business group -- cited the work of the Sustainability Accounting Standards Board in putting together a framework for financial reporting initiatives around climate change, including efforts to insert sustainability language in initial public offering documents. “If you are going to do a new issue, you are going to need to cite [climate change] as one of the risks or disclose them before you go public.”

Bloomberg warned, however, that even without new financial disclosure requirements around climate change, that investors and markets will act swiftly against management teams that fail to act.

“The life span of a CEO is getting shorter, and CEOs are being held accountable for things they never thought they would be held accountable for before,” Bloomberg said. “If you have a plant and it gets flooded out, its not inconceivable that CEOs will lose their jobs because they didn’t take appropriate protections. Business need to assume the worst case and seek protections.”