Limited transparency around corporate sustainability risks can lead to investments that are bad for the environment, and investors’ bottom lines.
Yesterday BP abandoned its hope of bidding on a potentially lucrative exploration license in Greenland. The implication is that its tarnished reputation is undermining its ability to compete for projects. Across the Atlantic, the Tennessee Valley Authority has lost nearly $50 million in power generation during this summer’s heatwave, because the Tennessee river is too hot for the nuclear plants’ cooling towers to function.
What do these two stories have in common? They are both examples of how environmental degradation can hit home for companies. The global environmental crisis, including climate change, water scarcity and ecosystem degradation, isn’t just a problem for “greens.” It also creates significant financial risks for companies and their investors.
Environmental Risks Alter Balance Sheets
Such risks vary from sector to sector but include: potential liability for environmental accidents; the physical impacts of climate change on supply chains; and growing water scarcity in many parts of the world.
BP’s recent crisis generated by the mammoth Gulf of Mexico oil spill is an extreme example of environmental risk. It turned the company’s anticipated net income of $5.6 billion for the second quarter of 2010 into a record $17.1 billion loss.