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In the peak of summer, the news fell like a hammer blow. The conclusions of the IPCC’s sixth assessment report[1], making considerably less enjoyable reading than the latest summer novel, are incontrovertible: global warming is happening even faster and is even stronger than we feared, threatening humanity with unprecedented disasters. Not exactly something to rejoice about, when simultaneously, in numerous places across the planet, thousands of people have been facing extreme climate events: droughts, floods, wildfires, heat domes, etc.
When physical risks become reality
These consequences of climate change, which translate into extreme events, are physical risks. Long neglected because people considered them unlikely or in the distant future, they have come knocking at our door to make us sit up and take notice. In both rich and deprived countries, under every latitude and different climate, from Siberia to Belgium or Germany, not forgetting Greece or Louisiana, no-one is spared. Their social, environmental and economic ramifications are disastrous, and most often it is the most impoverished who pay the heaviest price, widening inequality even further between regions.
Chain impacts
With the increase in these risks, businesses must confront new pressures, which as yet too few of them are anticipating. These risks have both direct – damage to the company’s assets – and indirect financial repercussions, arising for example from disruptions in their supply chain. They then cause a significant impact on entities’ financial performance, affecting many facets of the proper management of their business activities. In April 2021, one of the consequences of a serious period of drought in Taiwan was the tension in the semiconductor industry, whose production consumes large amounts of water. This has led to delays in orders until 2023 in what is a highly strategic sector[2].
A concern for businesses and investors alike
Will this summer’s extreme climate events and their impacts serve as a reality check for political leaders and populations? That remains to be seen. As a responsible investor, we did not have to wait for this wake-up call to become concerned about the issue, and to seek ways to protect our clients’ savings. The companies we choose to invest in are also working to protect their business. Identify, assess, quantify, communicate, and act: these are the steps in our mutual progression. The task is tricky, as the data available is still in its infancy, but more and more businesses are rallying to the call. In 2018, 58% of CAC 40 companies explicitly mentioned physical risks in their reports[3]. Acknowledging what is at stake is a good starting point. Some companies such as MICHELIN, AIR LIQUIDE and KINGSPAN have gone even further by taking specific action to reduce their vulnerability, for instance by setting up business continuity plans, carrying out work to protect their assets at risk, or diversifying their sources of supply.
As part of our climate strategy, we endeavour to assess and manage the exposure of our investments to climate, and especially physical, risks. We ensure that the companies with the highest exposure have a strategy in place to reduce their vulnerability, and we engage with those that are getting to grips with these questions. We believe that dialogue and climate engagement are crucial in addressing environmental challenges.
By Coline Pavot, Head of IR Research, LFDE
[1] Climate Change 2021 - The Physical Science Basis, IPCC, 2021
[2] Le Figaro, 21/04/2021
[3] Quelle place pour les risques physiques dans le reporting des entreprises ? (What place should physical risks hold in company reporting?) CAC 40 Analysis, Carbone 4, 2019