Monday, December 04, 2006

Climate Responses

An article in Saturday's Washington Post and an editorial in today's Wall Street Journal reflect the growing focus on how business responds to climate change. Joel Garreau's Post article explains in clear, practical terms how the insurance industry is reacting, and how that reaction is changing the cost of home-ownership for anyone living near a vulnerable coastline. Insurance companies have progressed beyond the debate on climate science to deal directly with climate risk and the way it distorts the statistical models upon which they depend. The Journal editorial, on the other hand, addresses the unwelcome attention that one of the largest climate skeptics in the world, ExxonMobil, is receiving. The price of skepticism is increasing, and the implications of the gathering political backlash are unpredictable and scary, from the perspective of corporate boards and shareholders.

Mr. Garreau is not just a reporter, but a noted futurist and deep thinker on urban and land-use planning. If you own coastal property or aspire to, his must-read article will send chills down your spine. The financial pressures he describes could make the current national slump in home sales look like a boom market, with many existing coastal structures and building lots potentially becoming uninsurable in the near or medium-term future. In this respect, an insurance policy is like a time machine from the future; it transforms the latest view of future climate risks into a greatly increased current cost--or a policy cancellation. We don't have to wait for Al Gore's predictions to come true, because the outcome has been built into your annual premium.

Yet while "insurance companies approach climate change bracingly free of theory," others, such as ExxonMobil, skew in the opposite direction. Today's Wall St. Journal vigorously defends Exxon's right to skepticism, and to support other skeptics, in the face of an intimidating communication from two senior US Senators. In their October 27 letter to Exxon's CEO, Senators Rockefeller and Snow issue either an informal cease-and-desist order, or a thinly-veiled threat, depending on your interpretation.

Even though I have long disagreed with Exxon's approach to climate change, and personally had a hand in making one of their competitor's climate policies much more pro-active, my gut reaction is not far from the Journal's: if a publicly-traded corporation wishes to underwrite research establishing that the moon is made of green cheese, that ought to be between them, their shareholders, and their customers. However much I am persuaded of the validity of climate change theory and the evidence that supports it, it has a ways to go to attain the certainty of the Theory of Gravitation, or of Maxwell's equations of Electromagnetism.

The risks facing energy companies and insurers look quite different. If an insurance or reinsurance company underestimates the impact of climate change on its future claims, it will suffer large losses and might go out of business. If it overestimates them, it will write fewer policies, but they will be more profitable. If an energy company underestimates the risks, it faces lower sales, higher taxes, and some collateral damage to facilities, but all of that is survivable, and possibly even hedge-able. If it overestimates the risk, it will invest too much in projects and technologies that will not pay off, and not enough in more conventional activities that are its--and its shareholders'--bread and butter. It's not hard to see which firm has the greater incentive to be proactive. If science and economics were the only factors at play, that would be the end of the story; businesses would choose how to deal with these risks, and events and the market would punish and reward them accordingly.

However, we cannot ignore the growing importance of politics and public perception in this area, along with a strong trend toward greater accountability for past corporate mistakes. The political winds are changing, and it appears likely that the large gap between the US and Europe on climate change will narrow. Companies that are already moving in this direction will prosper, while those that don't will become increasingly isolated and vulnerable. The best advice I can give ExxonMobil is the same as I gave Texaco in the late 1990s: Nothing you say against climate change is credible. Your choice is between being seen as part of the problem, or part of the solution.

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