According to the National Oceanic and Atmospheric Administration (“NOAA”), July 2012 was the hottest month on record for the contiguous United States. Not only was July the hottest month, but as a whole, precipitation totals were lower than average, with drought conditions covering nearly 63% of the continental United States. These events follow a year of record-breaking weather extremes, including drought, heavy rainfall and storms. Of the significant events that resulted from these conditions, NOAA reports that drought upstream of the lower Mississippi River caused near-record low stream flow along the river, which impacted aquatic life and river transportation and that the Long Draw Fire burned nearly 560,000 acres in eastern Oregon, which was the largest wildfire to impact the state since the 1840s. Additionally, the drought has had disastrous effects on American farmers; many have lost corn and soybean crops and others have had to sell or slaughter cattle that they can’t feed. Moreover, as a result of these extreme conditions, the U.S. Department of Agriculture has declared more than half of all U.S. counties as disaster zones.

These extreme weather events, according to researchers at NASA, are definitively a result of climate change. According to James Hansen, the author of a new study from NASA, “it is no longer enough to say that global warming will increase the likelihood of extreme weather and to repeat the caveat that no individual weather event can be linked to climate change. To the contrary,

[NASA’s] analysis shows that, for the extreme hot weather of the recent past, there is virtually no explanation other than climate change.” Kevin Trenberth, the climate analysis chief of the National Center for Atmospheric Research, agrees, stating that “the fact that the first seven months of [2012] are the hottest on record is much more impressive form a climate standpoint, and highlights the fact that there is much more than just natural variability playing a role: Global warming from human activities has reared its head in a way that can only be a major warning for the future.”
These extreme weather events have real costs. For example:

  • Severe hailstorms in St. Louis and Dallas caused damage claims of over $450 million and $900 million, respectively;
  • The USDA estimates that the severe drought in the Midwest is expected to affected prices for corn and soybeans as well as other field crops, which will likely cause an increase in retail food prices; and
  • The 2012 Colorado wildfires cost nearly $450 million in damage to homes and vehicles, making it the most expensive wildfire season in the state’s history.

Given the growing consensus on climate change, its broad implications and the significant costs associated with extreme weather events, particularly for those companies involved in insurance or that have high levels of exposure to agricultural commodities, how do companies properly manage their operations in a dynamic environment? While there is likely not one broadly applicable answer for all companies, investors are increasingly pressuring companies to actively manage the risks associated with a changing climate and are also encouraging companies to reduce the environmental impacts associated with their operations.

Clearly, investors are beginning to understand the broad implications of climate change: during the 2012 proxy season, Glass Lewis reviewed several proposals requesting that companies provide increased disclosure regarding climate change risk exposure or that companies report and reduce their greenhouse gas emissions. These proposals received average support of 21.2%, which is significant for environmental shareholder proposals, particularly those requesting that companies take specific actions rather than those that simply request increased disclosure.