How much will climate change cost our biggest companies?
Analysis: A regulatory change to financial disclosure rules this week didnt get much attention outside the inner circles of banking and economics. The rule change, requiring large businesses to calculate and disclose their climate change-related risks, may not sound like much, but it won the praise of Nobel Prize-winning economist Joseph Stiglitz, who said New Zealand was leading the world. One academic even said it was the New Zealand governments most significant climate policy even more so than the Zero Carbon Act itself. To grasp why luminaries might be so excited, it helps to understand the sheer quantities of money at stake and how little we know about the risks to companies currently. The most direct financial risk of climate change for large companies is the Emissions Trading Scheme, which requires companies to buy carbon credits for each tonne of carbon dioxide-equivalent they emit. Carbon credits have been very cheap since the scheme was launched, but that is likely to change. A fairly conservative prediction from the Productivity Commission has prices rising from around $21 pe tonne of carbon now to between $75 and $152 in 2050. Its hard to put an exact value on a companys risk, because by definition, it is risk. It is not guaranteed. The future carbon price is unknown. It could end up anywhere from $5 and $500. But Otago University finance academic Ivan Diaz-Rainey has crunched the numbers on just how much the cost of carbon credits could hypothetically hit some of our biggest corporations bottom lines, based on their 2018 emissions. In a scenario where the carbon price hits $55 in 2030, Air New Zealand would have an annual revenue hit of 4 per cent. For a company with annual revenues of almost $6 billion, thats equivalent to $240 million. In the most extreme scenario, of a $200 price in 2050, the revenue hit would be as high as 14 per cent, or $840 million based on current revenue. The table below presents how climate change could hit the bottom lines of the most affected companies in New Zealand. Air New Zealand had the most climate liability risk of any Kiwi company, followed by Contact Energy, Vector, Fletcher Building, and Mercury Energy respectively. When the researchers counted emissions from suppliers as well as operational emissions, Fonterra rose to top place, with a revenue hit of either 15 or 22 per cent by 2050, depending on the carbon price, if the dairy exporter had to pay for its emissions. Farmers are currently exempt from the Emissions Trading Scheme, but have been given a deadline of 2025 to come up with their own emission pricing system, or join the ETS. READ MORE: * Explainer: $700m to make waterways clean again * How to invest without committing 'climate crime' * KiwiSaver members won't be shortchanged by managers cutting fossil fuels Globally, companies are carrying over a trillion dollars in climate-related risk, all of which has until now been unquantified, meaning it isnt being reported on the books. That risk could be from a declining industry, such as oil.It could also be a bank that has given out loans to loads of homes which are sitting on eroding seasides and cliffs, or in low-lying flood-prone areas. For large asset management companies, it could be all of the above. Companies could avoid some of these costs by changing their businesses to be friendlier to the climate, and preparing for the changes. But until now, they havent had to tell investors what the risks were, so it was harder to scrutinise their game plans. In the future, all businesses with more than $1 billion in assets in New Zealand will need to produce a report each year estimating how much climate change could affect their business. Theres nothing in these rules which makes companies address those risks, but by reporting their risks, it levels the playing field and helps investors pick companies which are well-prepared for the future. Lets take two hypothetical energy companies, Greenpower and OilCorp. Greenpower produces some fossil fuel energy, but has been investing heavily in transitioning their business towards new solar and wind farms. OilCorp, meanwhile, is happy to churn out as much fossil fuel power as possible and is raking in a hearty profit as a result. To an investor deciding which company to buy shares in, OilCorp and its massive profits probably look a lot more attractive. But in reality, Greenpower has been preparing for the future, while OilCorp is now incredibly exposed to risk. In order to meet global climate goals, the world will need to move strongly away from fossil fuel energy in the coming decades. Green energy will likely continue to get cheaper and more efficient, government policies will favour cleaner producers, and fossil fuel power will become less popular with consumers. In 20 to 30 years, Greenpower will be pretty happy they invested in those wind and solar farms, while OilCorp will have seen their profits shrivel away. Requiring both companies to report their climate risks helps investors make their choice. Someone looking for short term profit might still buy shares in OilCorp, but a long-term investor will see that OilCorp will burn out, and choose to invest in Greenpower instead. In theory, that means Greenpowers stock price will go up, and OilCorp will be more likely to invest in new, climate-friendly power plants. Clarification: The table reported in this article is based on 2018 reported emissions. For some firms, emissions will have changed materially since then. For example, in March 2020 Vector divested from the Kapuni gas processing plant which accounted for 83 per cent of the company's emissions. The table does not reflect Vectors current and future climate liability, which is significantly lower than it was in 2018.