An Exclusive Look at the Companies Most Exposed to Climate Change Risk — and What They’re Doing About It
Since taking over the global supply chain for Merck in 2012, Craig Kennedy has handled tornadoes, droughts, and powerful storms.
Hurricane Maria, which tore through Puerto Rico in 2017, was a more onerous challenge: Merck’s cholesterol drug Atozet and its chemotherapy product Temodar are manufactured on the island. Kennedy got the factory up and running in a week, but the roads were still a wreck, so he began planning for a new supply chain out of Singapore.
“We weren’t as prepared for the destruction of the infrastructure as we would like to have been,” Kennedy recalls. “You cannot predict what’s going to happen.”
Such dangerous unpredictability is only likely to increase. Stronger and more frequent storms, like the hurricanes in 2017 and 2018, are among the signs of global warming, or climate change, scientists say.
In recent years, corporations such as Merck (ticker: MRK) have been citing climate change as a risk factor in their annual filings. In fiscal 2017, some 15% of the S&P 500 publicly disclosed an effect on earnings from weather-related events, says Standard & Poor’s Global Ratings. Only 4% of the companies actually quantified the effect, S&P says. But for those that did, earnings were affected by 6%. (Comparable data for previous years weren’t available, and S&P didn’t identify specific companies.)
According to company filings with CDP, formerly the Carbon Disclosure Project, CVS Health (CVS) incurred $57 million in losses, as 1,263 of its 9,800 locations experienced short-term closures during the 2017 hurricane season. Ten locations experienced long-term closures. Another company, AT&T (T), had $627 million in natural-disaster costs and revenue credits to customers.
Extreme weather affects companies in different ways. It can erase demand for products, or increase it. Physical facilities, in particular, can be at risk. And while those costs are typically borne by insurers and reinsurers, they must ultimately be considered by shareholders, given the increasing frequency of weather disasters.
With extreme weather, “you can expect physical disruption of supply chains and inventories—a major cost because the frequency of these events is unprecedented,” says Paula DiPerna, a special advisor to CDP. The organization serves as a disclosure system for companies and regions to measure their environmental impact.
“Investors are asking more and more detailed questions about exposure to environmental issues, unplanned and hidden potential risks due to disruption and unpredictable weather,” she says.
How to put a price on climate change?
We asked Four Twenty Seven, a market intelligence firm based in Berkeley, Calif., to share its climate-risk analytics and determine which of the S&P 500 companies are the most susceptible to extreme weather and climate change. The firm develops its scores using its databases of corporate facilities, as well as climate and weather data.
Four Twenty Seven looked at 24 industry groups to see which phenomena were material to each industry, and then came up with a scoring system. (The firm is named after a target set by California in 2006 to reduce greenhouse-gas emissions to below the state’s 1990 level of 427 million metric tons.) It sells its data to financial institutions and corporate enterprises that invest in bonds, real estate, and other securities.
Four Twenty Seven looked at all of a company’s physical sites, whether owned or leased, and then assessed them for exposure to climate-change risk. Some 70% of each company’s score was for a measure called operating risk, which includes heat stress (the frequency and severity of hot days), water stress (drought-like patterns), floods (the number of historical floods and the frequency of future heavy rainfall events and intensity of rainfall), sea-level rise, hurricanes, and typhoons, and socioeconomic risk (measuring a company’s geographical operating environment and its ability to recover from climate impact).
The remainder of the score combined what Four Twenty Seven calls market risk, or the vulnerability of a company’s end market to climate risk, and supply-chain risk, or climate risk associated with countries that make up a company’s likely supply chain.
What the examination discovered was that some of America’s largest companies, despite high marks for sustainability, remain vulnerable.
Many companies, including Merck, are already mitigating the effects of potential disruptions. But the advent of more-frequent severe weather could present a game of Whack-A-Mole for companies as they adjust their supply chains.
“We’re steadily moving toward a new normal where billion-dollar disasters are a regular occurrence,” says Emilie Mazzacurati, founder and CEO of Four Twenty Seven. “This combination of extreme weather events and growing pressure from asset owners and regulators is pushing a lot of businesses to look for a way to understand their exposure and start managing their risks.”
Thanks to globalization, “you’re exposed” no matter where your company has its headquarters, says Michael Lewis, head of ESG Thematic Research at DWS Group, which is incorporating Four Twenty Seven data in its equity research. “Carbon foot-printing didn’t get us where we wanted,” Lewis says. “Then we moved to transition risk. Now, physical risk is the third piece. We’re still working with this and have a lot of due diligence.”
The investment advisor oversees $788 billion in assets and is one of the world’s largest investors of insurance-company assets.
A list of the 15 most exposed companies in the S&P 500 is nearby. Barron’s asked all of them about their plans to mitigate the risk of extreme weather on their facilities. Four Twenty Seven trawled through several commercial and public data sources, but some of its findings were not current. (We updated and corrected the information where we could.)
Greatest Exposure
The 15 companies whose facilities have the greatest exposure to climate change and extreme weather, according to the market intelligence firm Four Twenty Seven, are shown below, ranked by the overall score. We also show the operations risk, which accounts for 70% of a company’s score, as well as market risk and supply chain risk . Market risk is the vulnerability of a company’s end market to climate risk. Supply chain risk is the risk associated with countries that make up a company’s supply chain.
“We rely on several commercial and public data sources to obtain our business facility data,” Four Twenty Seven CEO Mazzacurati says. “Occasionally, there is out-of-date information, or facilities are miscategorized. This highlights the need for companies to be more transparent about the location of key facilities, which investors need to understand the climate risk exposure in their portfolios. Better data will provide better pricing of risk for investors and for companies themselves.”
Four Twenty Seven’s list of the most exposed, surprisingly, includes some of America’s best-run companies. At No. 14, for example, is the fund giant
T. Rowe Price Group (TROW), whose headquarters sits by Baltimore’s Inner Harbor. According to Four Twenty Seven, two-thirds of the big money manager’s facilities are exposed to sea-level rise, and more than half are exposed to flooding.
It was certainly something that concerned the company after Hurricane Harvey flooded Houston in 2017, Blaise D’Ambrosio, T. Rowe’s vice president of global business continuity, tells Barron’s.
T. Rowe Price then analyzed what floods of 100-year and 500-year magnitudes might mean for Baltimore. The company is “well-prepared” to maintain critical business functions and serve clients in the event of a natural disaster, D’Ambrosio says. It has recovery sites just south of the city and an hour and a half west, as well as a backup site for global trading. It has business continuity strategies for all offices outside the U.S. It also has worked to reduce its own carbon footprint, decreasing greenhouse-gas emissions by 14.6% since 2010. “We don’t believe that climate change poses an unmanageable risk,” D’Ambrosio says.
The utility
Consolidated Edison (ED), at No. 6, has a quarter of its facilities exposed to sea-level rise, particularly around New York City. According to Four Twenty Seven, the company also faces water stress at facilities in California and heat and water stress in southern Texas.
In 2012, ConEd customers suffered as Superstorm Sandy flooded the New York City subway and much of the surrounding suburbs. As seawater touched electrical systems, fires erupted. The storm damaged ConEd’s distribution system, interrupting service to 1.4 million customers. Costs topped $460 million.
After Sandy, “it was clear to us that weather patterns were changing fundamentally, and we needed to protect our customers and equipment,” a ConEd spokesman says. Subsequently, the company received regulatory approval to spend $1 billion to fortify its energy delivery systems. That, it maintains, has prevented more than 370,000 outages since 2013.
Another utility,
PG&E (PCG), has lately been seen as a casualty of global warning after wildfires possibly sparked by its power lines tore through parts of California that had been hit by a prolonged drought. Citing a potential $30 billion in liabilities, PG&E recently said that it would file for bankruptcy protection. Still, PG&E was just tied for No. 46 on the list.
Atop the list was Norwegian Cruise Line Holdings (NCLH), which has several facilities in Miami, including its headquarters, freight and passenger transportation facilities, and travel agencies. All are highly exposed to floods from extreme rainfall and to hurricanes, which can lead to costly damage and disrupt operations. Norwegian didn’t respond to requests for comment.
No. 2 Western Digital (WDC) has more than a fifth of its facilities greatly exposed to floods and water stress, according to Four Twenty Seven, which “can lead to hindered operations, supply-chain disruptions, and costly merchandise damage.” A Western Digital spokesman declined to comment and directed Barron’s to the company’s sustainability practices and programs on its website.
Next was NextEra Energy (NEE), the world’s largest utility by market value, and a heavy investor in solar, wind, battery technology, and other sustainable solutions. Nevertheless, it ranks poorly because 52% of its facilities are exposed to hurricanes, with risk concentrated in a few dozen facilities along Florida’s Atlantic coast. Facilities are also vulnerable to heat stress, which can cause operations disruptions and equipment failure when energy demand rises. NextEra also declined to comment.
Micron Technology (MU), the semiconductor giant, was No. 4, with nearly a quarter of facilities exposed to floods and hurricanes. Much of the operations risk is concentrated in East Asia. A Micron spokesman said that Four Twenty Seven’s data “seem questionable.” While some locations might be exposed to flooding and storms, he said, “that does not necessarily lead to a conclusion that we are vulnerable—i.e., that Micron will sustain actual material financial impact from those events.”
The spokesman added: “A full assessment must take the next steps of looking at the actual site and structures, and what activities take place at that site, to analyze true vulnerability.”
No. 5 was Eastman Chemical (EMN), with 27% of its facilities exposed to floods in locations such as St. Louis and Houston, and 14% to hurricanes in East Asia. Floods also pose “significant reputation risk to chemical companies facing public backlash in case of flood-induced spills,” Four Twenty Seven wrote. Eastman didn’t respond to requests for comment.
Also on the list: Seagate Technology (floods, water stress); chip equipment manufacturer Applied Materials (floods, cyclones, water stress); utility Public Service Enterprise Group (sea-level rise, floods); Dominion Energy (floods, water stress); Royal Caribbean Cruises (floods, sea-level rise, heat stress), and biotech firm Incyte (floods, sea-level rise).
Seagate (STX), PSE&G, and Royal Caribbean (RCL) didn’t respond to requests for comment. Applied Materials (AMAT) said in a statement: “Environmental risk assessment and mitigation is an important part of our operations at Applied Materials and something our experts evaluate regularly, conducting ongoing assessments of our locations and maintaining detailed emergency-response and disaster-recovery plans.”
Dominion (D) responded: “We are confident in the safety and security of our facilities, and are constantly working to strengthen them on a regular basis.” Incyte (INCY) declined to comment, saying it wasn’t familiar with the data.
Bristol-Myers Squibb (BMY) is No. 15, with 29% of its facilities highly exposed to hurricanes and typhoons, particularly in southern Japan, Puerto Rico, and Florida. Bristol said it has “contingency plans in place to mitigate potential risks associated with operating globally, including supply chain, weather patterns, regulations, and energy costs.” The drugmaker added: “We believe addressing climate change is a shared responsibility among industry and governments.”
Other databases on corporate climate risk are being developed. For example, Axa Investment Managers, the investment arm of the giant French insurer, is building one about the physical facilities of companies it invests in. The system is expected to be running by the end of 2020.
“The more you can measure it [risk], the more you can manage it,” says Roelfien Kuijpers, global head of strategic relationships and head of responsible investments at DWS. “We’re at the beginning of a very significant long-term trend.”
Companies are likely to be pressured by shareholders to disclose more on their climate risks. One driver will be the Task Force on Climate-Related Financial Disclosures, which was formed by the Financial Stability Board, the international body established after the 2008 financial crisis that includes all of the G20 major economies and makes recommendations about the global financial system. It was spearheaded by Mark Carney, the governor of the Bank of England. Former New York City Mayor Michael Bloomberg is chairman of the task force, which, among other things, recommends that companies do scenario analyses.
“There’s a tendency to look for risks that are well known, but what we’re showing is there’s exposure to any number of hazards,” Mazzacurati says.
No. 8 Merck, for example, has hurricane exposure in 25% of its facilities, including dozens of pharmaceutical preparation facilities in Japan and the Eastern U.S. A fifth of its facilities are exposed to floods, including sites in Baton Rouge, La.; Atlanta, Switzerland, Shanghai, and Seoul.
Over the past few years, Kennedy, Merck’s global-supply chain chief, has identified possible disruptions and sought ways to deal with them. The drugmaker had too many facilities on the South Asian subcontinent, exposing it to climate risk, resource risk, and compliance risk, so he began creating alternative supply chains in Europe and moving some production back to the U.S. Such major actions require painstaking planning. “Movement and sourcing of pharmaceutical supply chains is a long process because it’s a regulatorily scrutinized activity,” he says.
Last fall, as Hurricane Florence approached the East Coast, Kennedy’s team swung into action, focusing on two factories: one in North Carolina, and another in Virginia. Both make vaccines, including a critical deterrent for measles, mumps, and rubella, as well as hospital products and pharmaceutical packaging.
The team members reviewed their disaster-readiness plans. They prepared generators and made other emergency provisions in the facilities in case of significant disruption. Some workers began sleeping at the factories. As Hurricane Florence neared, Kennedy took the precaution of shutting the factories. Then, the hurricane turned, heading toward South Carolina. Merck had dodged a bullet. After two days, the facilities reopened.
“We learned a lot from Maria that we applied for Florence,” Kennedy says. Mostly, he adds, “we learned that it can go for you or go against you, and you need to be prepared either way. No matter what, you cannot predict what’s going to happen at the end.”