Firms’ Climate Risks Are Often Unknown. How One Opened Up.

HPE also did something few companies do: It disclosed what it said were climate-related risks to its investors.

More companies may soon be required to make more substantive climate disclosures amid growing pressure from investors and from regulators for businesses to think more about the future physical impact of changing climate patterns.

Under the Biden administration, the Securities and Exchange Commission is expected to issue rules compelling companies to do a better job of disclosing their climate-related risks.

Such disclosures pose difficult questions for companies. What is a climate risk versus a normal extreme-weather risk? The Houston region has always been prone to heavy flooding and hurricanes, for example, though some scientific research has begun to link higher ocean water temperatures with increased storm intensity.

Mr. Neri, who became HPE’s CEO in February 2018, said HPE decided to do more to estimate its potential exposure to build trust with investors.

“This was a wake-up call to force us to think much more broadly” about the risks HPE faced, Mr. Neri recalled recently. The company said it has spent the past 3½ years identifying existing and future vulnerabilities.

Companies are required to inform investors about all material risks they face, but the climate is often addressed in generalities. The current SEC guidance on climate disclosure is more than a decade old and focuses on the potential impact of regulations and international accords. The acting SEC chair has promised to re-examine this issue and update the guidance.

“The quality of disclosures is highly uneven and generally lousy,” concluded research published last year by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. The number of companies disclosing climate-change risk has been rising over the past few years, it said, but details were often too vague to help investors determine which companies faced real problems.

“The big blind spot is the physical risk of climate change,” said David Victor, professor at the University of California, San Diego and co-author of the Brookings paper. He added that very few companies disclose specific risks, or what they are doing to mitigate their vulnerabilities.

HPE has taken significant steps to safeguard its operations, and has done more than most to talk to investors about its steps, according to securities experts and a review of corporate disclosures by The Wall Street Journal.

Two months after Hurricane Harvey, HPE announced that it was moving all manufacturing operations out of Houston. Most went to a facility in Chippewa Falls, Wis. The reason cited is that the Midwest location is “less vulnerable to acute physical climate-related risks,” according to an HPE disclosure. Other Houston operations were shifted to Guadalajara, Mexico.

The company took a $93 million charge in 2017 to pay for storm damages not covered by insurance claims. Beyond that, it didn’t disclose costs related to moving its headquarters and other operations to Texas from California, or the cost of its work assessing its climate-related risks.

A year later, in 2018, HPE was one of the first to publicly estimate how it would fare under two climate scenarios: a global temperature increase of 1.5 degrees Celsius, and a temperature increase of more than 2 degrees. The Task Force on Climate-Related Financial Disclosure, a group created by the international Financial Stability Board, had recommended that companies conduct the stress test to gauge their short- and longer-term risks.

HPE projected that an increase of more than 2 degrees Celsius could result in “extreme weather events” that could cost the company $800 million, versus $200 million for the smaller temperature increase. The company also concluded that the lower temperature increase presented a large market opportunity, as companies invest in cloud computing—and purchase HPE equipment—to use technology to find solutions. It reran these scenarios the following year using improved models.

Mr. Neri said a key conclusion was that HPE had more to gain than to lose from confronting climate change, if it moved quickly.

“Definitely climate change is going to have a huge impact to our society and the business overall,” he said. “I don’t think we have a lot of time. We have to do more, and we have to go faster.”

In December 2019, HPE expanded its disclosures of risks and the need to build additional resiliency. “Climate change serves as a risk multiplier increasing both the frequency and severity of natural disasters that may affect our world-wide business operations,” the company stated in its annual securities filing.

Last year, HPE convened workshops including executives that handled siting of its operations, risk management and other business units. They examined four future climate scenarios designed to “test the extremes of those uncertainties” and develop mitigation strategies. One result was to incorporate more climate risk analysis into supply-chain planning decisions, to “buffer HPE from supply chain disruptions,” according to a company synopsis of the workshop.

HPE’s emphasis on building more climate-resilient operations is already paying off, Mr. Neri said. Investors are asking more questions, he said, and customers are giving preference in contract bids for sustainability practices, such as reducing its carbon emissions.

Mr. Neri said he calculated that the company was awarded $847 million in contracts in the fiscal year that ended in October because of extra consideration from its climate engagement. It booked $27 billion in total revenue over the same span.

Meanwhile, HPE has stuck with a pledge to eliminate greenhouse-gas emissions from its operations and product use by 2050. Mr. Neri says he plans to eliminate emissions, not purchase carbon offsets, an approach used by other companies.

The company announced in December that it is leaving Silicon Valley for the Lone Star State. But its new campus, scheduled to be open in early 2022, demonstrates it is committed to doing things differently now.

It is in the Houston suburb of Spring, intentionally located 21 feet above the crest of Hurricane Harvey flooding, and is further from the coast. HPE said it planned to either move all of its facilities to safer ground or invest in adaptation measures within five years.

Write to Russell Gold at [email protected]