Risk Mismanagement

By Salmon, Felix | Mother Jones, July/August 2010 | Go to article overview

Risk Mismanagement


Salmon, Felix, Mother Jones


They know global warming threatens their bottom line. So why can't most corporations adapt to or at least hedge against it? BY FELIX SALMON

1 Adaptation strategies have essentially zero PR value. Unlike mitigation policies, which companies love to tout, adaptation plans have nothing to do with saving the planet. Instead, they're all about trying to thrive if and when the planet starts to fall apart. That's not something any savvy company wants to trumpet to the world.

2 There's a mismatch of time horizons. Climate change takes place over decades, and corporate timescales generally max out in the five- to seven-year range. Businesses typically won't spend significant money planning beyond that period, especially because the effects on business models and future profitability are so difficult to predict.

It's easy to talk about how hotel companies with coastal property might have to face more hurricanes, or rising sea levels. But it's impossible to know what is going to happen to any given beachfront resort with a sufficiently high degree of certainty. Given the enormous amount of variability in any complex model, if a company spent a lot of money carefully mitigating the risk of X, it could end up getting blindsided by Y instead. 'These are very difficult models to develop, with more rain here, less rain there," says Andy Hoffman, associate director of the Erb Institute for Global Sustainable Enterprise at the University of Michigan.

3 Even if the effects of climate change are foreseeable, they can be impossible to hedge against. Say you're an electronics manufacturer who is pretty sure that climate change is going to wallop Bolivia, resulting in political unrest and a spike in the price of lithium. All your devices run on lithium batteries, so this is a serious risk, but it's far from obvious what you can do about it. It's silly to start stockpiling lithium, and you can't even bet on rising lithium prices io years from now, since it's not a metal that is heavily traded in the futures markets. Essentially all that you can do is be very clear about the risk in your sec filings and go about your business as normal. And identifying a risk is not the same thing as being able to negate it.

A classic hedging strategy is to buy insurance. …

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