Last month, my colleague Christina Carlson and I released our report, Stormy Seas, Rising Risks: What Investors Should Know About Climate Change Impacts at Oil Refineries. The report analyzed the risk that five companies—Chevron, Exxon Mobil, Marathon Petroleum, Phillips 66, and Valero—face from sea level rise and storm surge, and compared that to what risk companies did and did not disclose to their investors.
Working with Ceres, a nonprofit working to accelerate the adoption of sustainable business practices, and five investment firms (Calvert Investments, Walden Asset Management, PAX World Management, Trillium Asset Management, and the Christopher Reynolds Foundation), we sent letters to the companies sharing our report findings and asking for better disclosure of climate-related risks and how they are being managed.
So what kind of response did we get?
Better disclosure for investors
As we were releasing our report, companies were filing their 2014 Form 10-Ks with the U.S. Securities and Exchange Commission (SEC). The Form 10-K represents public companies’ official and mandatory communication with investors on the material risks they face. Even though the SEC issued guidance in 2010 asking companies to consider how climate change affects their risks, many companies do not disclose climate-related risks.
We received direct response letters from two companies, Exxon Mobil (which did not address their lack of SEC disclosure as discussed in a previous blog) and Chevron (who pointed to their newly filed SEC 10-K).
In response to our report and pressure, in this year’s Form 10-Ks, two of the five companies—Chevron and Phillips 66—added language discussing the risks they face from the physical impacts of climate change, including sea level rise and coastal storms! Though it doesn’t link these impacts to climate change specifically, Chevron wrote:
Chevron utilizes comprehensive risk management systems to assess potential physical and other risks to its assets and to plan for their resiliency. While capital investment reviews and decisions involve uncertainty analysis, which incorporates potential ranges of physical risks such as storm severity and frequency, sea level rise, air and water temperature, precipitation, fresh water access, wind speed, and earthquake severity, among other factors, Chevron cannot predict the timing, frequency or severity of such events, any of which could have a material adverse effect on the company’s results of operations or financial condition.
Phillips 66, too, added discussion of physical climate risk in their Form 10-K. And unlike Chevron, Phillips DID acknowledged the connection to global warming for sea level rise and changing storm intensities . The company wrote:
The potential physical effects of climate change on our operations are highly uncertain and depend upon the unique geographic and environmental factors present. Examples of such effects include rising sea levels at our coastal facilities, changing storm patterns and intensities, and changing temperature levels. As many of our facilities are located near coastal areas, rising sea levels may disrupt our ability to operate those facilities or transport crude oil and refined petroleum products. Extended periods of such disruption could have an adverse effect on our results of operation. We could also incur substantial costs to protect or repair these facilities.
Later, the company adds that “The ultimate impact on our financial performance” from climate change depends on “any potential significant physical effects of climate change (such as increased severe weather events, changes in sea levels and changes in temperature).”
Unfortunately, the other three companies—Exxon Mobil, Marathon Petroleum, and Valero—have still yet to significantly discuss physical climate impacts in their disclosures to the SEC and elsewhere.
What constitutes good disclosure?
The added language from Chevron and Phillips 66 is certainly an improvement. The two companies had only minimal discussion of risks in prior SEC filings. But are these disclosures sufficient for investors looking to make informed decisions about their assets?
In addition to the broad discussion of climate-related risks we see above, investors would prefer to see concrete information on the financial impacts of climate change—what kind of costs might be associated with such damages from climate-related physical risks? And what is the company doing to prepare for or mitigate these risks? Companies should share information about the steps they are taking to manage these risks.
Shareholder Action at Phillips 66
Phillips 66 shareholders have also made clear that the company’s above disclosure is insufficient. Led by Calvert Investments, they filed a shareholder resolution asking that the company “issue specific disclosure regarding the company’s awareness of and preparation for physical impacts and risks related to climate change including storm surges and sea level rise.” Though the proposal has since been withdrawn in negotiation, it demonstrates shareholder interest in this important issue.
The move by shareholders could spur change at the company. Phillips 66, which has several coastal facilities that may be vulnerable to climate impacts including their Linden, NJ refinery that we modeled in our report, may be inclined to reconsider its treatment of climate-related risks in its communications with investors. For the sake of investors, taxpayers, and the communities around Linden, I hope that they do.
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