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What are S&P 500 Companies Saying About Climate Risk, Adaptation, and Resilience?

Climate Proof analysis shows extreme weather and climate shocks are discussed, but A&R not so much

AI-generated via DALL-E

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TL;DR

  • Climate Proof analyzed S&P 500 earnings call transcripts for Q4 2023 to find out how blue chip executives are talking about physical climate risks and adaptation and resilience

  • Many companies talk about weather impacts to their businesses, especially those in the Utilities, Industrials, and Consumer Discretionary sectors

  • Fewer speak about specific extreme weather events and acute risks, like floods, wildfires, and droughts

  • Only a handful of companies directly reference adaptation and resilience. However, a number do speak about this indirectly, using phrases like “protection plan” and “investments to improve service”

Canny investors are hunting for signals that companies understand the financial threats posed by climate shocks and are taking steps to guard against them. When it comes to publicly traded companies, many are turning to financial disclosures, which regulators are forcing companies to furnish with enhanced climate-related content. However, there’s another channel through which firms can communicate climate risk information — their quarterly earnings calls.

These are opportunities for executives to boast about their companies’ successes and put a gloss on their shortcomings. It’s also often where they’ll mix it up with the equity analysts who tune in to ask questions or clarify certain datapoints. Investors have mined earnings call transcripts for decades in search of nuggets of information that may offer a trading edge. It makes sense that they could also use them to glean useful climate risk and opportunity data.

Climate Proof went to find out what’s being said on climate risk and by whom, starting with the US’ biggest companies — those in the S&P 500.

We discovered that while blue chip firms do discuss certain climate shocks in their earnings calls, this is true of some sectors more than others. However, few are actively talking about adapting to, or building resilience against, such threats. 

This does not necessarily mean that companies aren’t taking climate risks seriously. But it does suggest the imperative to harden companies against climate threats is a topic that executives feel they don’t need to raise in public.

Climate Proof scraped the Q4 2023 earnings calls transcripts for 482 of the companies in the S&P 500. Those missing either adhere to a different reporting cycle, don’t conduct earnings calls, or did not have their transcripts published by third party services. These transcripts were then searched for specific climate physical risk related keywords as well as for ‘adapt’ and ‘resilience.’ Excerpts around located keywords were extracted and manually reviewed to ensure their climate relevance.

The cleaned dataset provides a window into the climate-related topics discussed by some of the world’s largest corporate players.

Want to explore the data for yourself? Become a Climate Proof subscriber and email [email protected] for beta access to the interactive data dashboard.

Heavy Weather

Of the transcripts analyzed, 113 (23%) discussed ‘weather’ in the context of their financial results. This was the most commonly discussed climate impact across the range assessed.

Some companies talked about weather to clarify loss drivers for the quarter or the year; others to highlight the importance of resilience-focused investments. Twenty-eight of these companies are from the Utilities sector. A further 20 are Industrials, while 16 are Consumer Discretionary entities. 

References to Physical Risk and A&R Keywords by S&P 500

Climate Proof, ‘S&P 500 Climate Physical Risk Signals’

Utilities companies frequently grapple with extreme weather events, which can cause power outages (in the case of storms) and demand surges (when temperatures are unusually high or low). Executives at Ameren, the holding company for a clutch of power entities, discussed how “volatile weather events” — including “some of the most impactful storms in the last 10 years” — caused power outages last year. They also explained why US$3.6bn in infrastructure investments had been made in recent years: to “reduce the frequency and duration” of weather-inflicted blackouts.

Retail executives groused about bad weather as a reason in-store sales dipped below expectations in the fourth quarter. Home Depot bosses said “unfavorable impacts from weather in January” contributed to lower sales, while those at Loews said “periods of extreme weather” caused a “sharp drop in traffic” that same month.

It wasn’t just cold weather that harmed earnings, either. Executives at VF Corporation, which owns The North Face and other outdoor brands, said “unseasonably warm weather” hurt its sales last year.

Many companies that spoke about the weather also described how storms dinged their earnings. This keyword was referenced by 43 companies (9%), with Utilities again leading the way. Nineteen of these firms talked about storm-related disruptions. For example, leaders at DTE Energy said the company faced “significant headwinds from an unprecedented combination of weather and storm activity.” The company saw earnings come in US$170mn lower for 2023 compared with 2022, with “warmer winter weather, cooler summer weather and higher storm expenses” all taking a toll. 

Five Energy companies cited storms in their earnings, too. Occidental Petroleum executives said January winter storms slowed production by 8,000 barrels of oil equivalent across its onshore North American wells, while Valero Energy said a winter storm in January 2023 “took refining capacity offline” and a “big inventory reset.”

Fires, Floods, and Hurricanes

Other acute physical shocks got an airing this earnings season. Thirteen companies referenced hurricanes, 11 fires, 10 floods, and five droughts. 

A few of the hurricane mentions were callbacks to Hurricane Ian in 2022, a seismic event for global insurers and reinsurers. Some executives explained how the absence of a similarly devastating storm was a key driver of pricing last year. For example, Brown & Brown, an insurance broker, said “low hurricane activity” last year was a reason behind “some moderation in the rate of increase for cat [catastrophe] property [coverage].”

Once again, Utilities companies were in the frame as well. Duke Energy executives spoke of Hurricane Idalia, a Category 4 storm that rocked Northern Florida in August 2023. However, theirs wasn’t a tale of woe. Instead, the storm was used to highlight the success of the company’s “storm protection plan investments”, which led to its best reliability performance in more than a decade — a clear example of climate adaptation success.

Utilities & Energy References to Physical Risk and A&R Keywords

Climate Proof, ‘S&P 500 Climate Physical Risk Signals’

Half of the companies that mentioned floods were Financials.  For example, insurance broker Marsh McLennan said it experienced “a headwind of nearly a point from lower flood claims” in its MGA [Managing General Agents] business.

In addition, a curveball question on flooding was asked of executives at PSA, an owner of self-storage REITs (Real Estate Investment Trusts). The analyst wanted to know whether flooding in the Los Angeles area had produced a material change in storage demand. While CEO Tom Boyle said there wasn’t a surge in demand, the question nevertheless shows that in some cases, climate shocks may actually benefit a company’s bottom line.

Wildfire impacts were referenced by a range of organizations. One that was hit particularly hard by this peril was Host Hotels & Resort. Executives said the Maui wildfire, which devastated the Hawaiian community last October, dampened its revenue per available room (RevPAR) for 2023. In the accompanying report, the company said the disaster took a US$22mn bite out of net income.

In fact, in 2023, Duke Energy Florida had its best reliability performance in more than a decade, largely due to our significant storm protection plan investments. These investments also aided restoration efforts in Hurricane Idalia, saving outage minutes and speeding return to service.

Lynn Good, Duke Energy CEO

Gold mining company was also rocked by wildfire impacts last year. Executives said Canada’s year of infernos disrupted its Éléonore operations in Northern Quebec, contributing to lower production numbers for the year.

Utilities companies were also vocal on wildfire risks. Executives at PG&E, the Californian power company that infamously fell into bankruptcy in the wake of the Camp Fire, spoke at length on the firm’s “wildfire mitigation plan”, particularly on last year’s improvement to its in-house wildfire metric, which suggests it is getting better at managing this risk:

“This year’s number of 0.93 was a reduction of 71% from 2017, and our lowest annual number since we began calculating this metric. The metric demonstrates that we continue to drive down wildfire risk in 2023, even after adjusting for fewer circuit mile days under our three or higher conditions when the risks of catastrophic wildfire are highest,” explained PG&E CEO Patricia Poppe.

Finally, drought references were made by companies from a number of sectors. Leaders at Chubb Limited, a major insurer, said drought-related crop insurance developments “resulted in an elevated combined ratio” for the year, meaning it took a hit to profitability. Elsewhere, speakers on the call for fertilizer producer FMC said its results were “negatively impacted by drought conditions.”

A&R Direct References Lacking

Few of the S&P 500 spoke directly about climate resilience or adaptation on their earnings calls. One reason may be that these terms are not yet in mainstream use among financial analysts and C-suite executives. Instead, phrases like “protection plan” and “investments to improve service” or “reliability” were used to describe efforts to harden companies against climate shocks. 

There were some exceptions, however. Utilities firm Entergy was one standout. On its recent call, executives spoke at length on a US$1bn transmission and distribution investment plan for “accelerated resilience.” Alliant Energy also spoke about how its focus on “improving reliability and system resilience” is expected to help continue a 20-year decline in the frequency and duration of outages.

A&R Keywords by S&P 500

Southwest Airlines CEO Bob Jordan also highlighted resilience, in the context of the company bouncing back from disruptions from Winter Storm Elliot, which wreaked havoc with airlines in December 2022. “We quickly mobilized to put immediate mitigation efforts in place, while simultaneously building a robust plan to prepare us for future extreme winter weather disruptions,” he said.

These scant examples don’t go into the specifics of A&R measures. On the one hand, this is to be expected given there’s a lot of ground to cover in a public company’s earnings call. On the other, it does suggest that climate physical risks, and the need to guard against them, are not top-of-mind among executives and financial analysts.

Still, what can’t be overlooked is that many S&P 500 companies are talking about climate shocks in one way or another, and acknowledging that they do have an impact on their bottom lines. This is the kind of information that should drive greater investor focus on the physical risk drivers of financial performance and increased interest in the financing of A&R solutions.

Want to explore the data for yourself? Become a Climate Proof subscriber and email [email protected] for beta access to the interactive data dashboard.