The companies most at risk from climate change

Richard Mattison, Trucost CEO, joins Yahoo Finance's Akiko Fujita to discuss how 60% of S&P 500 companies are at risk from climate change, according to S&P Global's latest report.

Video Transcript

AKIKO FUJITA: 2020 is on track to become the second warmest year on record. From wildfires to hurricanes, the extreme weather is starting to have a material impact on some of the world's largest companies. S&P Global recently crunched the data of more than 500,000 corporate assets to examine the climate risk to investors.

Let's bring in Richard Mattison. He is the CEO of Trucost, which is a division of S&P Global. And he joins us from Edinburgh today. Richard, this is just kind of a fascinating study that you have done about that the risks that are present to these companies. And you've kind of divided into the physical and then the transitional risks.

So let's talk about the physical risks first because there's a number here that I think is quite alarming. Almost 60% of S&P 500 companies hold assets at high risk of physical climate change impact. How do you measure that risk?

RICHARD MATTISON: Yeah, so it's actually something that has historically been very difficult to do. What we did was we looked at the S&P 500 companies, and within S&P Global, we actually have data on the types of assets those companies own and where they're located. So for example, it could be a mine, or a power station, could be some real estate, various different types of assets that we examined. And we mapped those assets to the owners in the S&P 500 companies.

And then on top of that, we layered on top eight different types of natural hazards that could affect those assets. So for example, floods, droughts, wildfires, rising sea levels, hurricanes, heatwaves, those types of physical impacts of climate change, we mapped on top of the assets. And we looked at three different scenarios out into the future, that the IPCC, the climate change governing body, has formulated. And we found that for S&P 500 companies, nearly a third of the companies in the S&P 500 have assets at very high risk of the physical effects of climate change under a business-as-usual scenario.

AKIKO FUJITA: And so Richard, when you talk about sectors, who's most exposed here? We tend to think about the energy sectors, especially because we see the impact from the hurricanes in the Gulf Coast, or the fires as a result of the utility companies. I mean, is there a sector breakdown where certain sectors are more at risk than others?

RICHARD MATTISON: Yeah. We do find some sectors are more at risk than other sectors. But it really does depend on the specific type of hazard. So when you look, for example, at rising sea levels, and some of the predictions would show that beyond 2100, sea level could rise beyond 1.5 meters. That would really be the larger part of lower Manhattan, which actually would mean the real estate sector obviously would be significantly affected.

If you're looking at things like heatwaves, actually that can have a serious impact on power provision and electricity producers, as can wildfires. And when you're looking at floods and droughts, well, it really depends on where you are in the US, but power stations need water, as do farmers, as do many others, right? So it really depends on the type of hazard in terms of how the different sectors are affected. But I would say that there's a much broader set of sectors that are affected by the physical effects of climate change than the sectors that would be affected should there be action on climate change.

AKIKO FUJITA: And so when you highlight those risks, how much of that is already reflected in equity and bond valuations? If you're talking about the equity valuations for particular companies-- let's say, in energy, how much of that has actually been factored in right now? And to the larger question, what more needs to be done so that investors have a little more transparency on those risks?

RICHARD MATTISON: Yeah. I mean, I think I would say that very little has actually been priced in to some of those valuations. And the reason why is because this information is actually quite hard to come by, which is the reason why we put it together in the first place. It's not historically been available. So when you're looking at the extent to which, for example, a municipal bond is priced, people really haven't had the right type of information to be able to look at physical risk over a long duration of time.

And actually, we collaborated with our colleagues at S&P Global Ratings, and we examined the extent to which municipal bonds could be affected by looking at every single county in the US. And what we found that when we looked at all of the counties and we looked at one risk, which is water scarcity, we found that 38% of counties are at risk of water scarcity-- again, out under a business-as-usual scenario.

So those who are issuing municipal bonds and those who are evaluating those bonds, really this is new information to allow them to examine the risks of the types of infrastructure and other types of investments those bonds are funding. So really, it's not been well-priced by markets in your view, and that's the reason why we provided the information.

AKIKO FUJITA: And very quickly, Richard, I've heard you say business-as-usual scenario a few times. I know you ran these models through climate change through 2050. What's the likelihood of that business as usual actually playing out when you look at where climate-- or global warming has gone over the last several years?

RICHARD MATTISON: Yeah. I mean, that is the most likely scenario right now. So what everyone is pushing for is a scenario which is 2 and 1/2 degree warming or less. But the most likely scenario currently is tracking close to 4 degrees or more. And so it's called the RCP 8.5 scenario. That's to get technical, but that is the scenario that's most likely to happen at the moment without further action to sort of flatten the curve.

AKIKO FUJITA: Richard Mattison, the CEO of a Trucost, great to have you on today.

RICHARD MATTISON: My pleasure.