Over my 38-year career at Caterpillar we grappled with economic upheavals. We saw new industries rise from the rubble of old ones and recessions that shook the global economy, but the company is still strong and well positioned for the future. Risk management became part of our DNA.
It makes sense that as the impact of climate change on the economy becomes increasingly clear, so does the need for businesses to take action to prepare for and reduce its impact. Ignorance is an invitation to financial loss. Companies that don’t manage risk don’t last long.
Across the Midwest, a region that I’ve called home for over 20 years, agriculture is the backbone of the economy. The Midwest accounts for almost two-thirds of national corn and soybean production. In the next 5 to 25 years, absent adaptation, yields for corn and soybean crops in some Midwestern states could decline by 15 percent as a result of increased heat from climate change.
A storm doesn’t need to be in your backyard to impact your bottom line. Recently, we’ve seen how disruptions to international supply chains can have negative impacts on the American economy. The 2011 floods that hit Thailand were the worst seen in that country for 50 years and suspended operations at over 14,000 companies- including Ford and Apple.
This month I joined the Risky Business Project, led by former Secretary of the Treasury Hank Paulson, former New York Mayor Mike Bloomberg and hedge fund manager and environmentalist Tom Steyer. Their early research demonstrates that climate change is a real risk to American business. We’re now working to identify how businesses can manage and reduce these risks.
When I was CEO of Caterpillar, the global financial crisis led to an almost 40 percent drop in revenue. I had to respond quickly and strategically — including cutting leadership compensation, freezing others, and layoffs across the company. We had readied ourselves with teams that were prepared to respond to sometimes vicious and unpredictable business cycles. As well as preparing for known risks, staying ahead of the curve on technology and innovation, combined with good governance structures and planning ensured the long-term success of Caterpillar.
Business leaders now find themselves at a similar crossroads. Climate change poses real risks that need to be managed. Investment in clean energy solutions is one, potentially profitable way of reducing these risks. So, over the next six months, I’ll be working with the Risky Business Project to better understand the financial implications of a transition to a clean energy economy. We want to know what it will cost and where there are opportunities for business to generate returns.
The investments we make today in long-lived infrastructure, such as power plants, cars and buildings, can lock the American economy into technological and energy pathways for decades to come. The best time for most businesses to change is when their assets are at the end of their productive life. Over half of U.S. electrical generating capacity was built before 1980, meaning that many of those power plants with average lifespans of 40 years are operating past their retirement age.
When it comes to replacing this infrastructure, there is no single energy solution. Our new report will look at any source of energy that can contribute to lower greenhouse gas emissions including solar, wind, nuclear energy, natural gas, carbon capture and storage, and a range of other commercial or near-commercial solutions.
Energy efficiency, for example, provides an opportunity for companies to increase their bottom line and lower the nation’s greenhouse gas emissions. In 2014 alone, energy efficiency led to $800 billion in savings for U.S. consumers and businesses.
While markets can create wealth and reduce climate risk, sound public policies at every level of government are also necessary to ensure that the conditions are right for American business. This does not mean more regulation. It means clear and consistent policies and a regulatory environment that reflects reality. The climate is changing and policy signals must change with it.
Every company in the U.S. has a stake in this. Whether you’re a bank, a utility, a homebuilder or a vehicle manufacturer, climate risk affects you. There are opportunities to make decisions now that can reduce this risk and generate profit.
It’s time for American business leaders to rise up to this challenge and together build a safer and more prosperous America.
Jim Owens is the former Chairman and CEO of Caterpillar.
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