Point Taken op-ed: Pandemic risk was in the fine print
By Dan Barkin
The virus that took down the economy was a risk known to many businesses. It was right there in the 10-Ks, annual reports that companies file with the U.S. Securities and Exchange Commission. In the section where public companies disclose risks they face, the word “pandemic” is in the laundry list. Companies don’t say there’s a 90% chance or 1%, but they mention pandemics because there’s enough chance. Last year, 21 of the 50 largest North Carolina public companies by market capitalization listed pandemics/infectious diseases as risks to their businesses.
Concord-based Speedway Motorsports, which owns eight NASCAR tracks, said basically that a pandemic could shut it down in the 10-K signed by Chairman O. Bruton Smith in March 2019. Most people who bothered to read that probably thought, “Well, yeah, that asteroid would do the same thing if Bruce Willis doesn’t nuke that bad boy in the 1998 thriller, Armageddon.” Same odds.
One year later, a public health asteroid shut down NASCAR.
I realize that 10-Ks don’t get a ton of respect. They are often regarded by investors as unenlightening boilerplate.
But the coronavirus crisis reminds jaded investors that you should read them and their risk sections to see what keeps top executives up at night. They have to warn of risks because they get sued by angry shareholders when bad stuff happens. Companies point to the boilerplate and say, “No, we told you about pandemics.”
These companies have been telling you about another risk, climate change, a threat that can’t be stopped by a vaccine. Companies are worried enough to cite the risk, even though they haven’t completely figured out what to do about it.
Why are companies taking it that seriously when President Trump has described climate change as a hoax invented by the Chinese to bring our companies down? After all, the people who draft 10-Ks are not typically greenies. They are accountants, corporate lawyers — you know, Republicans. Well, there are a couple of reasons.
One is that even if companies don’t consider climate change as an imminent threat, they know most of the world’s governments believe it is, and regulation is ramping up. Large companies operate in many countries. Trump is not the last word, even in America. California doesn’t think it is a hoax and makes much of its own environmental policy. Ask carmakers. Or Charlotte-based Nucor, whose 10-K notes that California wants steel in public projects made in a climate-friendly way.
Second, companies can’t easily dismiss the work scientists have done under the leadership of a United Nations organization called the Intergovernmental Panel on Climate Change. The group, which has been churning out reports for years, is a major reason why the 10-K risk sections now mention global warming. IPCC reports represent the consensus of most scientists globally. Crucially, institutional investors controlling trillions in assets agree with them.
The IPCC reports are hundreds of pages long, but here’s your executive paragraph: The planet has gotten 1 degree Celsius warmer since the mid-to-late 19th century because of factories, cars, trucks, planes, farms — and air conditioning of North Carolina for Yankees like me. We are speeding to 1.5 degrees warmer, maybe as soon as 2030. It will take a monumental effort to stay at 1.5. We’ll need the end of gas and diesel. Zero-emission factories. New forests planted to pull carbon dioxide out of the atmosphere. No one is optimistic. But if we go about business as usual, we will push through 2 degrees and beyond, and damage may be irreversible.
We are seeing coral reefs die, fish species dwindle and hundreds of thousands of refugees driven off their land by drought. Climate change has been blamed for more frequent, larger wildfires in the West, and for turning Hurricane Harvey in Houston three years ago into a wetter, more dangerous storm.
Nearly five years ago, the world’s nations committed to reduce their greenhouse gas emissions in order to limit global temperature rise to 1.5 degrees. That would require carbon dioxide emissions to be reduced by nearly half by 2030 from 2010 levels.
Then President Trump was elected, and he started the process to pull the U.S. out of the Paris Agreement. He also rolled back other Obama administration climate policies. Companies can’t bank on the changes, however, especially if a President Biden is staffing the Environmental Protection Agency come next January.
Many North Carolina companies are preferring not to place all their bets on election cycles. The same proportion of the 50 largest companies that flagged pandemics and infectious diseases as a concern in their 10-Ks discuss — at greater length — the risks of climate change and expected regulatory burdens in their latest reports.
Electric power-industry giant Duke Energy put 93 million tons of carbon dioxide in the air last year. Its goal is net-zero carbon emissions by 2050. It has retired 47 coal-fired generating units and has reduced its carbon dioxide emissions by 39% since 2005. But many coal plants were replaced with natural gas plants, lower in emissions, but still fossil fuel. In its most recent 10-K, the Charlotte-based utility speculates that more aggressive regulation could force it to retire those gas plants early. These would be “stranded costs,” which is akin to making monthly payments on that SUV sitting on blocks in your yard.
One problem with 10-Ks is that companies differ widely in how they describe climate risk and their amount of disclosure. “It’s all self-reporting,” says Deborah Gallagher, a Duke professor who studies how corporate leaders deal with sustainability issues. “Report the risk in a specific way with data that’s audited.” For now, the reports are a work in progress with companies sending up flares: They are trying to reduce their carbon footprints, they are unclear about how much more regulators want and they are pretty certain that it will cost them plenty.
What you don’t see in these reports is the frustration CEOs must feel that the climate bill is coming due on their watch. When they were drilled in business school about maximizing shareholder value, no one mentioned that they were going to have to do it zero-emission style. Jack Welch and Warren Buffett didn’t have to do that.
For two centuries, companies prospered by burning fossil fuels. The greenhouse gas liability kept accruing in an invisible, Enron-ish, off-balance sheet sort of fashion. In the risk sections of the 10-Ks, you can see those missing costs are going to be showing up on the financials. Companies don’t know precisely how much — or when — but when it comes to climate change, corporations recorded the revenues but not the expense. The books don’t balance.