Over the past decade, investors, boards, C-suite executives, are all increasingly being asked about and held responsible for a set of non traditional business factors, and their impact on corporate performance or on shareholder returns. These environmental social and governance or ESG factors, don't show up in traditional accounting standards. There isn't a section for them in the mandated financial disclosures, but they may critically impact the long-term performance of each of your corporations or the companies in which you invest. In the next three videos, I'll break apart each ESG factor into its various elements. I'll highlight specific financial risks, as well as opportunities associated with them. Let's start with the environment, the E in ESG. Firms not only influence climate change through their emissions of greenhouse gases including carbon and importantly methane as well as nitrous oxide ozone and CFC's, they also set off a series of reactions from the natural environment, as well as from other stakeholders, that can impact their bottom line. Starting with the reactions in the natural environment, climate risk imposes physical risks on assets and on people. Higher temperatures melt polar ice caps, and glaciers raising sea levels which threaten residential commercial and industrial buildings from Miami to Manhattan, London to Lagos, Shanghai to Sydney. Workers in Pakistan as well as in California are less productive on the growing number of days with extreme heat and humidity, triggering wet bulb conditions, in which sweat can no longer evaporate. The heat combined with changing patterns of rainfall, are leading to a larger and larger number and larger scale of wildfires, that are destroying property, killing citizens and disrupting economies. From Lake Tahoe to Provence in France, Portugal, Greece and Tasmania. In other places hurricanes, typhoons and thunder cells, unleashed stronger winds and more concentrated rainfall again destroying property and infrastructure, including roads, railways, subway tunnels, power grids and more. Such physical risks also offer upside opportunity, for new beach front property currently inland, new land for wine-growing in Washington State in Canada, or for Champagne in the UK. New technologies for fire suppression or retrofitting resilience into fire extreme wind and rainfall. Beyond the immediate physical risk of climate change, there's also what is known as transition risk. In our collective efforts to mitigate these physical risks of climate change, governments, customers, communities, suppliers, competitors are all acting, which could alter the revenues costs or efficiency of firms grappling with climate risk. Governments may tax carbon or gas, or electricity, or subsidize alternative energy, with impacts on the value of a coal-fired electricity plant, a deep water oil or gas field, an aluminum smelter, a pulp mill, an auto factory, or a home with an oil burning furnace. Consumers may be willing to pay more for products and services made with renewable power. Communities may reject new coal mines or power plants, or oil and gas extraction facilities. These stakeholder reactions further accelerate the rapidly declining relative costs of renewable energy, such that not only energy producers like Exxon Mobil Chevron or Shell need to rethink the balance of their investments in fossil, versus renewable fuels, but large energy consumers need to do the same. The upside here is more obvious, ranging from clean energy generation, to micro transmission grids, to carbon sequestration and climate engineering. Moving beyond the GHG emissions that influence climate change, companies also admit a range of particulates into the air. These particulate shortened lives by an average of 2.2 years globally. The number approaches six years in India, and 10 years in part of the North of that country. It exceeds five years in Bangladesh and Nepal, four in Singapore and over two in Peru, Indonesia, Ghana, China and Togo. Like with GHG emissions, governments may and have shifted the regulatory standards, governing admissions, and customers, suppliers, community members of civil society, may focus their attention on awareness, mobilization, or lawsuits on polluters. Scrubbers to reduce pollution and air purifiers to address it before the air is consumed, are both promising growth areas. Water pollution also kills, both directly and indirectly. While we lack as precise estimates of the impacts as with air pollution, specialists point to the 15 year increase in life expectancy, within four decades in Africa, that coincided most notably with a widespread diffusion of clean water and sanitation. Nitrogen run-off, mostly from fertilizers, causes childhood stunting and undermines long-term agricultural yields. Increasing salinity in water supplies destroys enough crops to feed a 170 million people each year. Heavy metals and other industrial effluents are associated with cancer, cardiovascular and neuronal damage. Plastics and other contaminants in the ocean are digested by fish, in turn humans with unknown long-term consequences for health and for fertility. Once again, government policy or stakeholder activism may pressure companies who release untreated water to pre-treat their water waste or cover the downstream health consequences of their pollution. A notable recent case saw multiple US States seeking billions of dollars in damage against 3M, for their discharge at various US factories. Opportunities abound in the use of new filtration, osmosis or other technologies to treat polluted water. Pollution may also be buried in barrels or tanks or other containers or dispersed in soil. Studies of the 1,570 US superfund sites, have found not only health costs, in terms of cancer, miscarriages and birth defects, but also higher rates of suspension of children in schools, repeating grade levels, lower standardized test scoring and lower cognitive functioning. New business startups are also less common nearby, likely due to the lower desirability of residency for workers. Once again, new government policy or stakeholder mobilization can lead polluters or landowners to be forced to address either the cleanup costs or the damages caused from this pollution. In the largest ever such case Anadarko Petroleum agreed to pay 4.4 billion dollars of damages for the uranium contamination caused in their multiple sites across the United States, owned by their subsidiary Kerr-Mcgee. Upside potential can also be found, in exploring the potential of algae and bio-engineered organisms to process waste or constructing safe solid tubes, in which to embed radioactive and other waste materials. Less dramatically, but at perhaps equal or greater social costs overall, we currently generate 2 billion tons of municipal solid waste globally, with disposal costs estimated between 50-100 billion dollars per ton or 100-200 billion dollars per year. Efforts to increase the recycled component of automobiles, semiconductors and increasingly batteries, could dramatically reduce the costs incurred in waste disposal, and the health consequences associated with that waste. It could also proactively address the threat of increased landfill costs as space available for additional disposal shrinks. Particularly, in emerging markets, where the US and other industrialized countries have been shipping a growing portion of their landfill in recent years. Like with solid waste, technological alternatives to burying or burning are promising areas for innovation. Turning from pollution to resource use, water scarcity is an acute challenge in a growing portion of the world from China to Australia, to the Middle East across Africa to the Colorado River basin here in the United States. A company such as Coca-Cola or Anheuser-Busch InBev or Nestle, which draws water for their bottling operations all over the world, can exacerbate existing water shortages. In 2015, Coca-Cola for example, consumed 300 billion liters of water globally, in producing 160 billion liters of beverages which was less than half the water intensity recorded only five years ago. The 300 billion liters of water saved could contribute to agricultural productivity, reduced water contamination via salinity, and to public health. These savings also reduced its costs for water supply and lowered the potential regulatory and legal costs of lawsuits associated with contributing to water scarcity. Water scarcity invites innovation in desalination, as well as water conservation, capture and recycling. In the Amazon, Malaysia and Indonesia, as well as in parts of Africa, ranchers, palm oil plantations and other agribusiness clear cut and burn old growth forests to access temporarily high-value land for their operations. The destroyed natural resources for this clear-cutting both helped mitigate global warming, but they also supported indigenous populations, native species, and subtly but certainly influenced the evolution of human, social and physical systems of future generations. Efforts to preserve and protect this Flora and Fauna, as well as rain forests are growing topic of entrepreneurial activity. Note that in each of these cases, the harm caused by company to the natural environment created a reaction, through which subsequent potential harm impacted the company and its shareholders.
