In January 2019, Pacific Gas & Electric Co. (PG&E) became the poster child for climate risk when it filed the first ever “climate change bankruptcy.”
At the time, the California utility faced an estimated $30 billion in fire-related liabilities after state investigators linked its aging power lines and other equipment to a number of tragic wildfires including the Camp Fire, which destroyed the town of Paradise and killed 85 people. A company with a history of safety problems, PG&E ultimately paid for its negligence. Yet there was another factor at play. Worsened by rapid climatic changes, historic drought had turned California’s forests into a tinderbox.
As the planet warms, changes in temperatures and precipitation have increased the number and strength of certain extreme weather events. Depending on the region, the results can span prolonged heatwaves and droughts, severe downpours and floods, and even more intense storms.
The Rising Threat of Extreme Weather
In 2020, UK-based climate analysis and data provider Carbon Brief looked at roughly 20 years of peer-reviewed scientific studies to examine weather extremes around the world. It found that of 355 documented extreme weather events and trends, 69% were made more likely or more severe by the climate crisis.
These deadly events are also costly. In 2019, hurricanes, wildfires, and floods caused $150 billion in losses globally for business and the economy. In 2020, the US saw a record number of billion-dollar disasters.
Business leaders understand that climate risk exists. After asking more than 200 of the world’s largest corporations in 2018 to estimate how a warming planet might hit their bottom lines, the UK-based nonprofit climate disclosure organization CDP found that these companies faced around $1 trillion in potential climate-related costs in the coming decades unless they took proactive steps to prepare.
For example, Google’s parent company Alphabet revealed that higher temperatures could increase the cost of cooling its data centers; Japanese manufacturer Hitachi said that more rainfall and flooding could decimate its suppliers in South Asia; and Banco Santander Brasil noted how the region’s worsening droughts might make it difficult for some of its borrowers to repay loans.
Measuring and Disclosing Climate Risk
Many institutional investors have been pushing companies to disclose extreme weather and other climate risks for years, often through shareholder resolutions and other public pressure. US investors may now get their wish—the Securities and Exchange Commission under the new Biden administration is expected to require public companies to report climate risks and greenhouse gas emissions.
How accurately a company estimates risk and what investors do with that information is another question. In its CDP disclosure, PG&E greatly underestimated its wildfire liability risk. While the utility emerged from Chapter 11 in mid-2020, its problems are likely far from over. The company continues to struggle to upgrade its equipment as Northern California faces more drought and unprecedented winter winds.