What Did S&P 500 Companies Say About Climate Risk and Resilience Last Quarter?

The first quarter of 2024 is far back in the rearview mirror, and most blue chip firms have posted their results, conducted their earnings calls, and are now striving after second-quarter targets.

While financial analysts pore over reams of revenue data and projections to inform their stock picks for the season, here at Climate Proof the objective is a little simpler — to find out just how much climate physicals risks were mentioned by America’s top executives on their investor calls, and whether adaptation and resilience topics were discussed at all.

Long-time readers know this kind of analysis is dear to my heart. I published a similar breakdown back in March, covering Q4 2023. As paying subscribers, you can even play around with the underlying data dashboard here👇

What follows are the top-line findings from the latest batch of earnings calls. Dig in — I hope they make for interesting reading.

For this edition, Climate Proof analyzed the earnings call transcripts of S&P 500 companies from between March 31 and May 23. Most of these of covered financial results for the first three months of this year.

In total, transcripts from 453 companies were assessed. Companies not included in the sample have either yet to conduct their Q1 earnings calls, do not conduct earnings calls, adhere to a different reporting cycle, or do not have their transcripts published by third party services. 

Each text was then searched for specific climate physical risk-related keywords as well as for ‘adapt’ and ‘resilience.’ Sentences around the located keywords were extracted and manually reviewed to ensure the keywords were truly climate-related.

The cleaned dataset provides a window into the climate-related topics discussed by some of the world’s largest corporate players. 

Blame it on the Weather

‘Weather’ was a common subject in this round of earnings calls — and was most often cited as a drag on financial performance. Overall, 116 companies discussed weather in the context of their quarterly results. Twenty-five of these companies are in the Utilities sector. 

References to ‘Weather’ by S&P 500 Companies, Q1 2024

Interestingly, mild weather and extreme conditions alike were called out for having a financial impact. David Cambell at Evergy, a power utility servicing Kansas and Missouri, cited “unseasonably warm weather” as a driver of lower quarterly earnings: “Heating degree days were 11% below normal … negatively impacting our results by an approximate $0.07 per share,” he said. Meanwhile, over at Texas-based Vistra, Jim Burke said that “a winter event in mid-January” and “mild weather in February and March” both challenged the power generation team.

Consumer Discretionary company executives also said volatile weather conditions dampened earnings. Household names including Chipotle Mexican Grill and Starbucks cited bad weather for lower earnings versus the year-ago quarter. Casino and resort owners said weather issues lowered footfall for the quarter, too. Caesars Entertainment CEO Tom Reeg said its “Regionals” business — meaning its locations outside of Las Vegas — saw earnings down 3% year-on-year, and that “weather was a significant impact.”

Of course, fluctuations in the weather are something well-run companies prepare for, and may be little cause for concern for investors. However, climate change is ushering in more frequent and damaging weather extremes, which have the potential to catch unprepared companies by surprise. 

Some company executives spoke about the need to shield themselves against these risks over the first quarter. Again, many were Utilities companies. For example, Joi Harris at DTE Energy spoke about “modernizing our electric infrastructure to be more reliable and resilient given increasingly severe weather”, while Allen Nye at Sempra Energy talked up the company’s proposed System Resiliency Plan as a means to “improve customer reliability and overall customer service during and after extreme weather events”.

Dark and Stormy

Storms were the most frequently cited weather events in first quarter calls. Once more, Utilities companies were among the most vocal on these risks, understandably so given their ability to disrupt operations and harm power-generating assets. However, a handful of Industrials and Materials businesses highlighted storms as a problem, too.

References to ‘Storm’ and ‘Hurricane’ by S&P 500 Companies, Q1 2024

One particularly interesting discussion was had by Copart, a provider of online vehicle auction and remarketing services to auto resellers. CEO Jeffrey Liaw highlighted predictions of “a serious storm season ahead” in his remarks, going on to say the company was focused on “proactive preparedness”, to be delivered by: “Investing in our teams on the ground, our logistics technology, our fleet of vehicles and of course, our dedicated acreage reserved for handling the peak capacity needs that come with major events.”

However, worsening storms have the potential to be a financial boon to Copart, too. It turns out that insurance companies are big fans of Copart’s auction services, which they use to sell totaled vehicles to vehicle dismantlers. Interestingly, Liaw said that “long-run trends” are making “repairing vehicles less economically attractive to insurance carriers and totaling vehicles more economically attractive to them.” More frequent and devastating storms may be one driver, since they have the potential to cause greater damage to vehicles, thereby making totaling the best way for insurers to make up losses on auto policies.

3M, the conglomerate, presented another way in which escalating climate risks could be good for business. “We delivered strong double-digit growth in roofing granules driven by replacement demand and storm repair,” Monish Patolawala, the company’s chief financial officer, said on first quarter earnings. Bigger, badder storms could cause more damage to residential properties, presenting an opportunity for restoration and repair specialists to cash in.

Hurricanes, a flavor of storm all too common to the US mainland, featured in few earnings calls this quarter. This is to be expected given hurricane season has only just kicked off, and the last major hurricane to wreak havoc on US soil occurred back in 2022. Still, seven companies cited hurricanes in their earnings calls. Most referred to past storms and how their effects are passing through their results. However, Patrick Gallagher at insurance brokers Arthur J. Gallagher offered a word of caution on the future:

“We’re seeing [insurance] rates go up in property a little less viciously. Now having said that, if the wind blows this fall, we’re 1 month away from the start of the hurricane season, I’m just telling you all bets are off. I don’t know what’s going to happen. So for our clients sake, I hope that we have a benign season.”

Fire and Flood

The early months of the year are usually free from major wildfire events. 2024 was an exception. The Smokehouse Creek fire tore through Texas in late February and March, scorching over a million acres of the Lone Star State.

Few S&P 500 companies were materially affected. Xcel Energy, however, was one major exception. The utility said back in March that its assets did appear to have a role in igniting the fire, and on its earnings call CEO Bob Frenzel offered further clarification:

“Xcel Energy has acknowledged that our distribution poles appear to have been involved in an ignition of the Smokehouse Creek fire and the smaller reefer fire, which quickly burned into the Smokehouse Creek fire footprint. We dispute claims that Xcel Energy acted negligently in maintaining and operating its infrastructure.”

He went on to say that the company had set aside US$215mn to cover expected litigation-related losses from the fire — a clear and glaring example of climate-related financial risk coming home to roost.

Still, Xcel is taking its status as the latest poster boy for climate risk seriously. Frenzel spent lots of time talking over the company’s efforts to make up for the Smokehouse conflagration and to ensure it doesn’t happen again:

“New and expanded actions include increased vegetation management, accelerated pole inspections, hardening and replacements, distribution undergrounding segmentation and covered conductor programs, transition line hardening and or rebuilds, enhanced recloser settings and proactive de-energize of lines, and situational awareness programs, including weather stations, cameras, and other monitoring software,” he said.

This laundry list of actions speaks both to Xcel’s determination to make amends, and to the wealth of climate adaptation and resilience opportunities available in the Utilities space. After all, surely there’s money to be made providing the above services to America’s most climate-vulnerable businesses as efficiently and cost-effectively as possible?

References to ‘Fire’ and ‘Flood’ by S&P 500 Companies, Q1 2024

Changing tracks, the words “flood” and “flooding” were barely uttered by executives this earnings season, understandably so since the US mainland did not suffer a flood event with a huge price tag last quarter. However, companies operating in markets that have suffered flood damage didn’t shy away from the topic.

For example, executives at John Deere, the agricultural and farm machinery giant, referenced the devastating floods in Brazil in their remarks. However, while the human cost of the floods is, and will continue to be, absolutely horrendous, financially the company emerged unscathed. Josh Beal, director of investor relations, said that while the company has facilities in the region “we do not anticipate any long-term impacts to the business at this time.”

Resilience by any Other Name?

A trend continuing over from the previous quarter is the sheer variety of words and phrases executives use to describe what readers of Climate Proof would recognize as “adaptation and resilience”.

While the word “adapt” in a climate-related context was uttered in only two earnings calls, and “resilience” in ten, plenty more calls included phrases that alluded to the importance of adaptation and resilience. For example, executives at American Electric Power spoke about “hardening and modernizing” the grid, while those at CMS Energy said it had to be “modernized and strengthened for increasingly severe weather.” Other phrases with an adaptation and resilience flavor to them include “operational preparedness”, “wildfire mitigation”, and “protections in place”.

So while it seems that “climate adaptation and resilience” is still not a series of words in popular use among America’s captains of industry, this does not indicate a lack of awareness of the importance of adaptation and resilience to business success — far from it.

What it does suggest, however, is that more work needs to be done educating the market on just what adaptation and resilience is, and why developing a common language around the theme is important for marshaling action (and investment) to climate-proofing purposes

We’ll see if the lexicon of adaptation and resilience gains any more traction as the year progresses. Given the efforts by multiple levels of government to get this on the agenda, I for one wouldn’t be surprised if the terminology becomes common currency a few quarters down the line.

Thanks for reading!

Louie Woodall
Editor