In 2017, extreme weather events (i.e., hurricanes and flooding) resulted in USD 344 million in economic losses, globally.[i] Chemical companies are particularly exposed to this risk due to their concentration of assets in regions prone to extreme weather events, such as the Gulf Coast region of the United States. This region is home to several refining and petrochemical plants, and to more than half of the country’s downstream chemical production.[ii] With growing investor concern about the physical impacts of climate change and extreme weather events, we examine chemical companies’ preparedness to face this material issue. We also take a closer look at Arkema as a case study.
Consequences of extreme weather
Hurricanes and extreme rainfall often result in flooding and costly damage to manufacturing facilities. In cases of serious damage, companies may be temporarily unable to resume their manufacturing activities, thus reducing their productivity and profitability. Companies that store volatile and toxic substances are particularly at risk as damage to their facilities may impact their ability to store these compounds safely, which could result in dangerous toxic spills and subsequent compliance and legal risks.
The case of Arkema
To get a better perspective on how extreme weather events may affect chemical companies, we will look at French specialty chemicals company Arkema as an example.
Hurricane Harvey reached land on August 24, 2017, in Texas. The hurricane was classified as a Category 4, the second highest classification on a 5-point scale where 5 represents the highest potential for damage and flooding.[iii]
On August 31, 2017, in the aftermath of Hurricane Harvey, two explosions occurred at one of Arkema’s plants in Crosby, Texas. The explosions were the result of heavy flooding caused by the tropical storm, which also caused a power outage at the chemical plant, shutting down its refrigerating system. In this particular plant, Arkema manufactured organic peroxides, a class of chemical that can become combustible when not stored at a low temperature. Without electricity to keep the refrigerators working, the organic peroxides became unstable, causing the two explosions and the release of toxic fumes. In response, Arkema evacuated everyone within a 1.5-mile radius of the plant.
The company’s proactive evacuation plan did not prevent a series of legal and regulatory repercussions. In March 2018, the nearby Liberty County filed a lawsuit against Arkema, claiming that the explosions caused residents to experience adverse health symptoms such as vomiting. The lawsuit sought penalties of up to USD 25,000 per day of non‐compliance with the Texas Water Code.[iv] In November 2017, Harris County filed a USD 1 million suit against Arkema, claiming the company violated several environmental regulations and put first responders at risk.
In August 2018, Arkema and two of its executives – including the CEO for North America and the Crosby Plant manager – were indicted for “recklessly” failing to prevent the fires and chemical releases.[v] The executives could face up to five years in prison and Arkema could face a fine of up to USD 1 million. The case is expected to go to court early this year and will be followed closely by companies and investors, as it sets a new precedent for the higher compliance risks chemical companies face following extreme weather events.
The location of Arkema’s Crosby facility was known to be flood-prone prior to the incident. In September 2016, a report from Factory Mutual Insurance Company (FM Global), Arkema’s insurer at the time, flagged the risks of flooding. Despite this documented risk, Arkema instead relied on long-term employee memories of flooding levels. The risk of flooding was therefore underestimated by the company because no employee could remember flooding of over two feet (0.61 meters) of water before Harvey. After Harvey, Arkema’s facility was inundated by six feet (1.8 meters) of water.
Extreme weather events: Are companies responsible if they’re not prepared?
The incident at Arkema’s plant highlights the growing vulnerability of many coastal and riverine facilities that store and process chemicals to the impacts of a changing climate, including increasingly heavy precipitation. Nine months after the incident, in May 2018, the U.S. Chemical Safety and Hazard Investigation Board’s (CBS) final investigation report into the case showed significant gaps in guidance related to flood planning or other severe weather events for companies operating in the chemical industry. The board called for more robust guidelines and regulations for the industry.
The growing frequency of extreme weather events raises compliance risks for chemical companies located in hurricane-prone regions. As illustrated by the recommendations from the CBS, regulations concerning the preparedness to respond to extreme weather events could potentially become more stringent. Therefore, to avoid being held responsible for eventual environmental or health and safety impacts resulting from the flooding of their facilities, chemical companies operating in flood-prone locations should prepare for these changes in regulation.
Mitigating chemical companies’ climate-change related risks – what should investors look for?
In order to engage with chemical companies operating in flood-prone areas and understand their preparedness to tackle physical climate change risks, investors should ensure companies report on the drivers contributing to their risk exposure and have implemented concrete measures to manage physical climate change risks.
Moreover, as extreme weather events become more frequent, companies should develop stronger programs to tackle emergency situations. Arkema has a relatively strong emergency response program compared to other chemical companies, but it was still unprepared to deal with the level of flooding caused by Hurricane Harvey. This raises questions about the preparedness of other companies in the industry to respond to these risks.
According to the CBS, to improve their ability to mitigate physical climate change risks, companies within the chemical industry can take several steps, including:
- Conducting risk assessments to evaluate their susceptibility to extreme weather events (e.g., assessing whether their facilities are in areas susceptible to flooding).
- Ensuring that equipment is not susceptible to failure and that independent layers of protection are available in the event of high-water levels (especially for companies located in identified flood risk areas).
- Developing specific policies to assess the risk that facilities face from flooding, particularly for chemical companies manufacturing organic peroxides or other volatile hazardous chemicals. Additionally, the companies should ensure backup power, capable of functioning during extreme weather events and guarantee the stability and safety of the stored chemicals.