Updated from 1:29 p.m. Monday with light editing throughout.
NEW YORK (TheStreet) -- The threat to profits from climate change is real, growing and affects all sectors of the economy, according to a report of findings by a nonprofit group representing large investors.
The Carbon Disclosure Project claims to represent over 750 investors managing a combined $92 trillion. Each year, CDP requests climate-change-related disclosures from public companies on behalf of those investors. Its latest report notes that, judging from survey responses of S&P 500 companies over the last three years, the awareness of a potential impact from various aspects of climate change has grown dramatically. According to the CDP:
- 45% of risks were described by companies as current or predicted to fall within the next 1-5 years in 2013, up from 26% in 2011
- 50% of the risks disclosed were described as more likely than not to virtually certain in 2013, up from 34% in 2011
- 68% of the disclosed physical risks were direct to operations in 2013, up from 51% in 2011
In the following pages, we look at the exposure of Chevron (CVX), Wal-Mart (WMT), Google (GOOG), Alcoa (AA) and Xcel (XEL) -- five leading companies in five different sectors -- as noted by the companies themselves in responses quoted by CDP.
Some of the threats outlined by the companies are simply a response to weather and environmental changes that may or may not be conclusively attributed to global warming. The following responses were chosen for this article in part because risks from climate change specifically, rather than merely bad weather, are cited by the companies themselves in response to the CDP surveys.
The stocks in this article would, in another context, represent a well-balanced portfolio and indeed, investors holding all five over the last five years should be more than pleased with the return. But because one storm or drought can affect several sectors, a single major event could put such a portfolio at risk. By extension, this large-scale aspect also means that the greatest risk from climate change is to national economies.
The following companies, speaking in their own words, serve as eloquent examples of what can very quickly go horribly wrong in the changing environment.
In the energy sector, responding companies most frequently cited the risk to offshore operations from hurricanes and extreme weather events, while a few also noted a potential impact from warmer winter temperatures on energy demand and oil prices and the potential for power outages to disrupt production and revenue. In its 2013 response, Chevron (CVX) was particularly emphatic about the risk to its extensive Gulf of Mexico operations.
There is concern that climate change may increase the frequency or intensity of hurricanes, which could affect our operations. The Gulf of Mexico is of particular importance. During 2012, net daily production for the company's combined interests in the Gulf of Mexico shelf and deep water areas and the onshore fields in the region averaged 153,000 barrels of crude oil (9% of our global production), 395 million cubic feet of natural gas (8% of our global production) and 16,000 barrels of NGLs (22% of our global production). Further, this region houses many of the oil and gas pipelines that move domestic resources from the Outer Continental Shelf to the rest of the country.
Citing the dual impact of Hurricane Katrina and Hurricane Rita in 2005, the company said:
The effects of the storms included a reduction in crude oil and natural gas production and added costs for repairs and maintenance of both offshore and onshore facilities, resulting in an approximate $1.4 billion negative impact in the second half of the year. Therefore, a similar event could cause a similar magnitude of financial impact.
That $1.4 billion figure probably understates the combined impact of potential storms, but it likewise overstates the effect to Chevron's investors in 2005 and 2006. Chevron's shares and dividend weathered those losses nicely, with the stock price staying within an adjusted range or $43 to $47 and the quarterly dividend rising 15% to 52 cents, or a roughly 4.6% yield. Investors who stuck it out should be feeling pretty good right now, with the stock trading at $123.22 and the quarterly dividend at $1.07, representing a yield of about 3.5%.
In the consumer staples category, Walmart (WMT), operator of Walmart and Sam's Club stores, gave a particularly noteworthy 2013 response to the CDP survey.
If sea levels rise, devastating effects could result on stores and the communities in coastal or low-lying regions. The example of Hurricane Katrina illustrates the potential effects. As a result of that event, we closed approximately 200 of our stores and clubs for at least some period of time. Out of those 200, we had 110 locations that suffered damage that ranged from moderate to severe. We had at least six stores or clubs that were shut down for more than 3 months. One of those remained closed until 2010 and two have never reopened. Our average daily sales per store in 2005 were just under $150,000 per day. Had just these six stores remained open, we would have achieved cumulative sales from them to date in excess of $500 million.
In addition to that loss, the company also noted "supply disruption, customer inconvenience and reduced demand, and disruptions to our own operations" as potential impacts it could foresee. Over a nine-year period, the company estimated it had averaged $20 million a year in losses from weather related events, with the actual annual total varying greatly "depending on the number and severity of extreme events."
Walmart stock currently trades at $77 with a dividend yield of 2.5%. From the period 2005 through 2011, the dividend slowly increased, but the stock price remained in a range roughly from $37 to $48, finally breaking through the psychological $50 level in the last quarter of 2011 as signs of economic improvement pushed investor confidence.
The materials sector companies cited a wide range of concerns about the impact of severe weather, flooding and drought on operations. Alcoa's (AA) global reach and diversified network of operations centered around aluminum metals and metal products makes it particularly vulnerable to such environmental change anywhere in the world and made for an interesting response to the CDP survey in 2012.
Reduced periods of precipitation in the Southeast of the United States in 2010 resulted in decreased hydroelectric generation at our four hydroelectric facilities. Similar low levels of precipitation in Brazil in the same time period resulted in higher cost of hydro-based electricity for Alcoa Aluminio (Brazil) operations. Recent drought conditions in Western Australia have strained bauxite refinery operations.
Alcoa has operations in the United States, Australia, Spain, Brazil, France, the Russian Federation, Hungary, the Netherlands, Norway, the United Kingdom, China, Germany and Italy. Post-2009, the stock has traded as high as $18 in 2011 all the way down to below $8 in 2013. It currently trades at $13.45 and pays a 0.9% dividend yield, down from over 1.6% at the start of 2010.
Many in the information technology sector cited rising energy costs to keep data centers from being damaged by the warmer temperatures. Google (GOOG) places data centers strategically to take advantage of milder climate and reduce heating and cooling costs, but is nonetheless exposed to this risk of cost increase. Like Alcoa, Google's global reach means it is exposed to climate change anywhere in the world, as it notes in its 2013 response to CDP.
Nature of the physical effect concerned: Google must cool its data centers to keep them in operation, and the amount of energy needed for the cooling is related to the outside air temperature. Hence, if global temperatures increase, this will increase the amount of energy required to cool the data centers, and increase the cost of running our operations. Location of this physical effect concerned: Given that climate change is expected to increase average temperatures globally, and we have facilities and operations around the world, this is a risk we face at all of our facilities globally.
Google's class C shares, GOOG, trade at $520.63 as of Friday's market close. Class A shares, GOOGL, which carry voting rights, trade similarly at $528.30. The company does not pay a dividend.
Perhaps none of the companies responding to CDP are as exposed to climate change effects as those in the utilities sector. Of the companies responding, most cited multiple causes that could impact facilities, customers and ultimately, the bottom line. Among these are warmer winter temperatures, diminished rainfall, flooding, severe thunderstorms, hurricanes and rising sea levels. One particular risk for utilities is the need to maintain their electrical grid rights of way, which become more costly as weather patterns change, increasing snowfall, flooding or fire hazard, for instance.
Of the utilities responses, the 2013 note from Xcel (XEL) most succinctly sums up the risks.
Increased energy use due to weather changes may require us to invest in more generating assets, transmission and other infrastructure to serve increased load. Decreased energy use due to weather changes may affect our financial condition, through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stresses, including service interruptions. Weather conditions outside of our service territory could also have an impact on our revenues. We buy and sell electricity depending upon system needs and market opportunities. Extreme weather conditions creating high energy demand on our own and/or other systems may raise electricity prices as we buy short-term energy to serve our own system, which would increase the cost of energy we provide to our customers. Severe weather impacts our service territories, primarily when thunderstorms, tornadoes and snow or ice storms occur. To the extent the frequency of extreme weather events increases, this could increase our cost of providing service. Changes in precipitation resulting in droughts or water shortages could adversely affect our operations, principally our fossil generating units. A negative impact to water supplies due to long-term drought conditions could adversely impact our ability to provide electricity to customers, as well as increase the price they pay for energy. We may not recover all costs related to mitigating these physical and financial risks.
Xcel current trades at $30.50 as of Friday's close and has a dividend yield of 3.9%. Since 2009, the stock has proven a solid investment, rising roughly 78%.
-- Written by Carlton Wilkinson in New York