How Will Companies Respond to the Risk of Climate Change?

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MIT SMR Strategy Forum

Each month, we pose a question about business, management, technology, or public policy to our panel of academic experts. Here you can see what they think and why.
Learn more about this series

Looking at the devastating pictures and stories coming from Australia’s bushfires in these early days of a new decade, the effects that climate change is having on the planet are readily apparent — as is the devastation countries will continue to face without major course correction. While warnings about the effects of climate change have been sounded for decades, the last year has seen increasing pressure on companies and investors to enact real climate policies.

We may now be entering a watershed moment, as BlackRock’s CEO Larry Fink wrote earlier this month in his annual letter to CEOs that, “Climate change has become a defining factor in companies’ long-term prospects,” and that his company, the world’s largest asset manager, would be “exiting investments that present a high sustainability-related risk.”

For this month’s poll we surveyed our experts on the following statement:

In the wake of recent climate-related disasters and related events, such as the bankruptcy of PG&E, corporations are now planning for the increased operational risks and potential liabilities caused by climate change.
RAW RESPONSES
WEIGHTED BY CONFIDENCE

Raw Responses

Responses weighted by panelists’ level of confidence

Panelists

Panelist Vote Confidence Comments

Richard Holden

University of New South Wales
Profile
Agree 9 “It is clear that there has been a marked upward shift in concern about corporate liability for climate-related events due to, e.g., shareholder class-action lawsuits. What exactly caused that shift is less clear to me, but it will be an important part of law and corporate governance going forward.”

Steve Tadelis

University of California, Berkeley
Profile
Disagree 4 “By no means do I have any expertise here, but from most of my knowledge vis-a-vis planning, these are the type of contingencies that I suspect most corporations to designate as too far removed from near-term concerns, and hence, they will likely neglect these issues.”

Joshua Gans

University of Toronto
Profile
Agree 8 “Regardless of politics, no profit-oriented business is going to take real risks.”

Anita McGahan

University of Toronto
Profile
Disagree 8 “Many companies are buying insurance and developing contingency plans, such as building partnerships for supporting the transfer of operations under emergency conditions. Yet the risks and liabilities associated with climate change are too great for almost any company to address fully through these techniques. Innovation for prevention and risk mitigation at scale is required.”

Richard Florida

University of Toronto
Profile
Strongly Agree 9 “Leading investment firms, like BlackRock, are already planning for climate change, saying they will not take on and [will] exit investments that further damage the climate or pose substantial climate-related risks. This sends a powerful signal. There is also the perception of being a bad corporate citizen, which can irrevocably damage image and brands. Not all corporations will do so, but many will.”

Yael Hochberg

Rice University
Profile
Strongly Agree 7

Erik Brynjolfsson

Massachusetts Institute of Technology
Profile
Agree 8 “Most smart corporations are certainly planning for the increased risks of climate change. Are they planning enough? Most certainly are not.”

Rajshree Agarwal

University of Maryland
Profile
Disagree 9 “Climate change-related warnings and environmental disasters have been around for more than 50 years with significant debate on if and what impact it has on economics and society. In light of this history, it is questionable whether one can make blanket statements on all corporations increasing attention to operational risks and liabilities based on one or two firms‘ fates.”

R. Preston McAfee

Economist
Profile
Strongly Agree 9 “Most corporations were examining the effects of climate change on their operations and future five years ago. Any that weren‘t would have started by now.”

Kathleen Eisenhardt

Stanford University
Profile
Strongly Agree 8 “Executives with whom I work are all concerned about climate change and consider planning for it as a critical risk.”

Meghan Busse

Northwestern University
Profile
Agree 8 “Companies are considering not only increased operational risks and potential liabilities, but also more fundamental changes to their strategies. However, this is not universal. There is a lot of variation among companies in how substantially they have responded to climate-related changes to their current and future business environments.”

Daniel Levinthal

University of Pennsylvania
Profile
Agree 7 “Clearly the answer here varies by industry and sector — but that is more an issue of degree than whether or not climatic changes are on the radar of executive teams for their implications for operational risk of specific events and longer-term strategic considerations regarding the viability of certain sites, shifts in demand patterns, and need for carbon-light processes.”

John Roberts

Stanford University
Profile
Neither Agree nor Disagree 4

Rebecca Henderson

Harvard University
Profile
Strongly Agree 10 “BlackRock‘s statement today underlines just how central climate change is becoming to the assessment of investor risk. Whether this changes behavior is, of course, another question.”

John Van Reenen

Massachusetts Institute of Technology
Profile
Agree 7

Tom Lyon

University of Michigan
Profile
Strongly Agree 10 “BlackRock, the world‘s largest asset manager, stated in its annual letter to CEOs that it is putting climate change front and center in its investing strategy going forward. CDP (formerly the Climate Disclosure Project) represents over 800 institutional investors with over $100 trillion in assets. Any companies that are not planning for climate risk at this point have their heads in the sand.”

Petra Moser

New York University
Profile
Neither Agree nor Disagree 5 “If PG&E is any guide for planning ahead, our future is dark and grim.”

Ashish Arora

Duke University
Profile
Neither Agree nor Disagree 5

Barry Nalebuff

Yale University
Profile
Agree 7 “Some companies are doing this type of planning, while others are not.”

Scott Stern

Massachusetts Institute of Technology
Profile
Agree 8 “It is clear some firms are starting to plan and that this number is growing rapidly, but many corporates — particularly in emerging economies — are still ‘head in the sand.‘ At the end of the day, global emissions keep rising (even if emissions per unit of GDP is falling).”

Timothy Simcoe

Boston University
Profile
Agree 8 “I think large corporations are working on this. They feel pressure from various stakeholders, including some of their larger shareholders like BlackRock. I have no confidence that smaller firms on the competitive fringe are planning for risks created by climate change. And even the largest firms can do little about risk to shared infrastructure.”

Lori Rosenkopf

University of Pennsylvania
Profile
Agree 8 “Many corporations have been doing scenario planning for quite some time, and disaster scenarios can be a part of this activity. Heightened salience of climate issues will only increase the diffusion of these and other risk management practices.”

Raffaella Sadun

Harvard Business School
Profile
Disagree 5 “I suspect that the majority of organizations (or people, for that matter) are still far from fully understanding what’s needed to protect themselves from extreme events. But the real issue is [what] we will collectively do to prevent these events in the first place.”

Shane Greenstein

Harvard University
Profile
Disagree 7 “Climate change alters risks in many unpredictable ways — coastal flooding, travel interruption, logistic complications. Some of the risks are difficult to insure against without public coordination and investment — remember the floods of New Orleans?”

Topics

MIT SMR Strategy Forum

Each month, we pose a question about business, management, technology, or public policy to our panel of academic experts. Here you can see what they think and why.
Learn more about this series

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