Nathaniel Bullard

Companies Take On the Next Environmental Threats

For the past 15 years, CDP has been asking companies and investors to disclose their businesses’ impact on the environment, as well as the environment’s impact on their businesses. My Bloomberg colleague Christopher Flavelle examined how some of the U.K.-based nonprofit’s respondents view the effects — and the opportunities it might bring — of climate change on their businesses in a deep dive last month. This week, I’m looking specifically at company risks related to water security and forests, and how the effects of climate change will force companies worldwide to change how they operate.

In 2018, more than 7,000 companies filed environmental reports to the CDP; more than 2,100 of them disclosed risks to water security, and 455 reported risks to forests.

At first glance, water security looks like a less significant issue than climate change, and forestry less significant still. But that’s not a fair comparison. The absolute number of respondents on water security and forests aren’t a fair reflection of the seriousness of those risks to companies; there are fewer companies exposed to those specific risks than to climate change. A financial institution might only have a minimal direct exposure to climate change through impacts on its office buildings, while a packaged-goods company is likely to be exposed to threats to water security and forests due to climate change. As Sultana Bashir, global director of forests at CDP, wrote in an email:

There is an understanding that climate change is a universal global issue that affects all companies, whereas risks around water security and deforestation are much more material for some companies than others, depending on sector, geography and other factors.

Given the nature of these three risks, and the fact that they aren’t universally applicable, there are a few ways we can think about these company disclosures.

The first is as a response ratio, which is useful because CDP’s surveys target only the companies it considers to be most affected by a particular risk. According to CDP, in 2018, it requested water risk disclosures “from just under 5,000 of the world’s largest companies from high impact sectors including Apparel, Chemicals, Food & beverage, Metals & mining, Oil & gas, Pharmaceuticals and Power generation.” Of those, more than 2,100 responded — a response rate of more than 40 percent.

CDP also requested forest risk disclosures from 1,595 companies, “specifically many of the largest and most impactful companies in terms of their ability to directly or indirectly drive deforestation, including Unilever, Tetra Pak, and L’oreal.” Of those, 455 responded — a 28 percent response rate.

Another way to view these disclosures is to see how companies treat risks to and from water and forests, not in scale but in the number of companies making disclosures last year compared to the first year CDP received responses.

In this way, risks to water security look similar to the ones posed by climate change. CDP has been collecting climate change risk disclosures for 16 years, water security risk disclosures for nine years, and forest risks for seven years. In nine years, the number companies disclosing climate risk had increased 1,500 percent, and the number of companies disclosing threats to water security had increased 1,100 percent. In seven years, the number of companies disclosing climate risk had increased 11-fold, and the number of companies disclosing forest risk had increased 355 percent.

Chart each risk over time, and trends are easier to spot.