The Coming Climate-Related Business Failures

Recently, Der Trumpenführer set about trying to challenge the findings of the government's own environmental experts rather than admit that climate change is real and that significant policy changes are needed.  Most Republicans in elected positions are little better and continue to bury their heads in the sand.  A piece in the New Yorker argues that it will be private industry which will ultimately force policy changes as the costs of climate change damage the corporate bottom line or force some businesses to file bankruptcy and/or go out of business. The industry that may force the most rapid change is the insurance industry which will either cease insuring certain properties or types of business operations entirely or drastically increase premiums.  Coastal real estate coverage may be one of the first areas where rising insurance costs and increasing storm damage take a toll on property values and savage municipal tax bases.  Here are article excerpts:

On January 15th, the World Economic Forum issued its annual Global Risks Report, which presents the results of a survey of what policymakers and experts perceive to be the world’s greatest challenges and threats. The report categorizes concerns by color: blue for economic risks, orange for geopolitical risks, purple for technological risks, red for societal risks. This year, green, which denotes environmental hazards, was dominant: the top three risks, listed by the “likelihood” that they would occur, were extreme weather events, failure of climate-change mitigation and adaptation, and natural disasters. . . . “Is the world sleepwalking into a crisis?” the report’s authors wrote. “Global risks are intensifying but the collective will to tackle them appears to be lacking.”

The same week, as if to illustrate the point, the California-based utility company Pacific Gas and Electric (P.G. & E.) announced that it would be filing for bankruptcy protection as a result of costs related to recent wildfires in the state. Between June, 2014, and December, 2017, P.G. & E.’s equipment helped start some fifteen hundred fires, according to an analysis by the Wall Street Journal. Many were caused by falling trees that toppled power lines, which then threw sparks onto the surrounding grass and forest.

In 2017, seventeen major wildfires in California were connected to P.G. & E.; the fires destroyed 193,743 acres in eight counties and led to the deaths of twenty-two people. The fire season of 2018 was worse; the California Department of Forestry and Fire Protection reported it as the deadliest and most destructive season on record. P.G. & E. said that it was facing approximately thirty billion dollars in liabilities as a result of its role in the 2017 and 2018 fires.                     P.G. & E. may be the most high-profile company to date to face collapse for reasons linked to climate change, but it won’t be the last. Coastal real estate is likely to be one of the first sectors of the economy to see values plummet due to rising seas and damage from storms. This hasn’t happened yet, because insurance companies are still willing to insure coastal properties, which means that property owners won’t have to bear the cost of the damage. But this is likely to change in the not-too-distant future. The National Centers for Environmental Information, which tracks U.S. weather and climate events, cited 2017 as “a historic year of weather and climate disasters,” which together cost more than three hundred billion dollars and included three tropical cyclones, eight severe storms, two inland floods, a crop freeze, drought, and wildfires. At some point, insurance and reinsurance companies will decide that writing policies in high-risk areas no longer makes financial sense, which could trigger a sharp decline in real-estate prices. Bruce Usher, a professor at Columbia Business School who studies climate change and investing, told me that he foresees three kinds of climate-related risks that may cause companies to fail in the future: physical risks, policy-related risks, and technological risks. The changing environment may cause damage to property or facilities owned by companies, or it could fuel lawsuits and liability payments related to damage caused by companies to others’ property, as was the case with P.G. & E.

[C]limate change itself will make certain products—most obviously cars using internal combustion engines, which are likely to be replaced by electric vehicles—obsolete. The insurance industry has been aware of these risks for some time and has been conducting studies to try to quantify them. The rest of the business world is increasingly focussing on them as well.

If the coming climate-related business crises will have one positive side effect, it’s that acute financial losses are likely to force policy changes in a way that environmental damage on its own has not. As one commenter on a recent Wall Street Journal article about P.G. & E. put it: “When capitalists decide the scientists are right, then the free market will adjust accordingly.”

What is lacking now, he said, is focus by policymakers in Washington on making changes that could actually turn things around. “People in this field say, ‘We know what the problem is, and we know how to solve the problem,’ ” Usher said. Our politicians, however, “don’t have the willingness to do something. That’s where we are.”