To understand the disruptions of climate change on industry, consider the humble lightbulb.
Twelve years ago, when Philips Lighting was considering the shift from incandescent lightbulbs to the much more efficient LED lights, the company faced an uphill battle.
“I had to do as much internal lobbying as external, because two-thirds of our sales volume was incandescent lightbulbs,” recalled Harry Verhaar, head of government affairs at Philips Lighting, the biggest lighting company in the world that is now known as Signify.
The shift in lighting has profound consequences for energy consumption: in 2006 lighting accounted for one-fifth of global electricity demand. But as lighting has become more efficient, that figure has dropped to 13 per cent today, and will fall to 8 per cent by 2030, according to Mr Verhaar.
The transition to LEDs is just one example of the disruption taking place across industries, as governments around the world try to reduce emissions by improving energy efficiency and cutting reliance on fossil fuels.
The impacts of climate change have become much more visible in the past year, in terms of direct physical impacts such as hurricanes and wildfires, and in policy impacts from climate-related legislation, such as rules encouraging efficient lighting. And companies are taking notice like never before.
As in any great disruption there are set to be winners and losers from this change, and the Financial Times will examine some of the industries that will be most affected in its series, Climate Control.
For Signify, the low-carbon transition has meant a surge in sales of LEDs, which now constitute about 70 per cent of its revenues, while incandescent sales globally have plummeted. “Everybody saw that, if you don’t cannibalise your own business, somebody else will,” said Mr Verhaar.
Many other sectors are in the middle of similarly disruptive shifts as the world shifts to a low-carbon economy, and corporate boards and investors are increasingly trying to understand what this change will mean for them.
The approval of the Paris climate agreement in 2015 was a key trigger, as nearly 200 governments pledged to limit global warming to less than 2C, sparking a series of related policy changes.
Mentions of climate change-related keywords in corporate earnings calls jumped after the Paris accord was approved, with 70 per cent more mentions in the three years following the agreement, than in the three years preceding it, according to a transcript analysis prepared by S&P Global for the FT.
What used to be the provenance of the marketing department or the sustainability team has become a core part of corporate planning in many sectors.
“It has been a huge transformation, from completely ignoring [climate change], to dealing with it in the CSR or marketing department . . . to becoming a major strategic issue for many companies,” said Nigel Topping, chief executive at We Mean Business, a non-profit organisation. “In quite a lot of sectors it is a big strategic issue that is not even called ‘climate change’,” he added.
From the rise of electric vehicles, to the heavy industries trying to cut emissions, the global response to climate change is starting to have a big impact.
In the oil and gas sector, one of the major stories of 2018 has been the new climate targets announced by BP and Royal Dutch Shell. Ten years ago it would have been unthinkable that the biggest oil and gas companies in the world would pledge to cut their emissions.
In a signal of how seriously regulators are starting to take this issue, the Bank of England in October told banks and insurers to improve their long-term planning for climate change — placing senior executives in the line of fire if they failed to do so.
The world has already warmed by 1C compared with pre-industrial times, which has contributed to record-breaking wildfires this year and increasingly frequent heatwaves. For insurance companies dealing with seafront real estate, to the electric utilities that must make sure their grid can withstand large wildfires, the physical impacts of a warmer world have become impossible to ignore.
A landmark report in October by the Intergovernmental Panel on Climate Change outlined how even half a degree of additional warming — the difference between 1.5C and 2C of warming — would expose an additional 420m people to heatwaves, and an additional 10m people to rising sea levels. If current trends continue, the world will be 3C warmer by the end of the century, a level that would disrupt life around the planet.
Another catalyst for the way companies view climate risks came last year, when the Financial Stability Board published a set of guidelines from its Taskforce for Climate-related Financial Disclosures (TCFD) about how banks and companies could disclose climate-related risks.
Charles Donovan, head of the centre for climate finance at Imperial College London, said that the TCFD “helped enormously” by providing some common standards.
“We’ve all gotten on the same page of what we are talking about,” due to the TCFD, he said, but added that there was still a way to go. “There is a lot of information out there, but nobody has really settled down on what is the information that moves the needle on value.”
Because this is a relatively new field, it is still very difficult for companies, investors and regulators to fully grasp and measure the impacts that climate change will have.
A recent scientific paper in Nature Climate Change found that more than 80 per cent of companies surveyed said they faced physical risk from climate change — but only one in five were able to quantify the related financial risk.
“It’s almost incomprehensible, the range of how this one thing [climate change] is physically manifest in the world. And it has really practical implications, in terms of how it affects companies,” said Allie Goldstein, lead author of the paper. Of the 2,000 companies surveyed, more than half said they expected costs to rise as a result of climate change.
A new field of financial analysis has recently sprung up that tries to better quantify the risks — and the potential impact on corporate valuations.
“The climate change topic in the financial sector is still in its very nascent phase,” said David Lunsford, one of the co-founders of Carbon Delta, a boutique analysis group focused on climate risk. “There is definitely bad data out there, and I feel strongly about it. The fact is that if you look at industrial activity and the reporting of greenhouse gas emissions you find major flaws.”
The earliest models of climate risk took a company’s emissions of carbon dioxide and multiplied that by a hypothetical carbon tax to gain an estimate of the impact of climate-related policies. However, this approach has largely been discarded, because carbon pricing has so far been lower than expected in most countries, and because it does not take physical risk into account.
“Carbon footprinting is a useful exercise, but it is not a risk metric,” said Mr Lunsford. Groups like Carbon Delta incorporate emissions estimates, along with regulatory analysis and patent data to calculate the potential impact on companies’ market cap from different levels of global warming.
“It’s very difficult to calculate the costs or the profits from a climate change scenario [like 2C or 3C] but that is where the whole industry is headed eventually,” he added.
Paul Simpson, chief executive of CDP, the non-profit that helped kick-start corporate disclosures of emissions when it was founded 18 years ago, said that one reason modelling was so difficult is that “we know the future won’t be like the past”.
“There are a lot of initiatives going on to produce better research,” he said. “Certainly on the data side, we don’t just want more data, we want better data.”