Thread by @emahlee

The climate crisis poses *significant* financial risks to Amazon. And not just in the usual ways one expects, like disruptions to business operations.

What and how big are these risks? Investors need transparency on Amazon's risk assessment and management plans.

THREAD 👇

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The moral reason for climate action has deeply resonated with Amazon employees. Over 6,700 Amazon employees have *publicly* signed their name to our open letter asking for bold, immediate climate leadership.

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medium.com/@amazonemploye…

Yet, money talks. Financial risk talks. I've tried taking some stabs at the financial reasons for climate action and risks to investors the climate crisis poses, but it's been harder to wrap my head around.

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https://twitter.com/emahlee/status/1074477020543778816

Luckily, I recently spoke with @AlexSteffen on the very real and imminent financials risks Amazon, and other companies, face who are not grappling with climate on a strategic, company-wide level. This thread 💯 was born out of Alex's thinking. Un mil de gracias, Alex!

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Plug for @AlexSteffen. He's one of the best minds, strategists, and visionaries on the climate crisis, what it means for humanity, and what we can do about it. He's also writing a book. Do yourself a favor, and check him out.

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kickstarter.com/projects/19108…

Biggest takeaway: climate is a fundamental, strategic driver of Amazon's risks and opportunities.

Amazon may not be a fossil fuel company, but that doesn't mean it's safe from the inevitable carbon bubble and a large-scale market correction.

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The carbon bubble won't just impact the fossil fuel industries. A correction often starts off rational and then panic ensues. Contagion will spill over to other companies that are 1) highly dependent on fossil fuels and, 2) whose business model services fossil fuel companies.

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Example of (2): banks who lend to fossil fuel companies.

Let's unpack (1) and (2) as it relates to Amazon, shall we?

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1. Amazon is massively dependent on fossil fuels for a huge portion of its business: shipping products. Recent business decisions show it continues investing in fossil fuel infrastructure: in Q3, 2018 Amazon bought 20,000 diesel vans.

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marketwatch.com/story/amazon-o…

1 (cont). AWS is another huge part of Amazon's business, bringing in more money than McDonald’s in 2018. A big part of the Internet runs on AWS's data centers. And guess what? Almost 50% of AWS runs on fossil fuels.

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qz.com/1539546/amazon…

usatoday.com/story/tech/tal…

2. Amazon has an "oil and gas" initiative which helps fossil fuel companies expand and accelerate fossil fuel extraction. The *opposite* of what humanity and the earth needs. I detailed Amazon's own marketing material wooing oil and gas companies:

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https://twitter.com/emahlee/status/1104218682253729792

2 (cont): @bcmerchant at @Gizmodo has more great reporting on how Amazon is aggressively pursuing Big Oil:

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gizmodo.com/amazon-is-aggr…

2 (cont): @KYWeise from the @nytimes also reports:

"On its website, Amazon says its customers include BP and Royal Dutch Shell, and its products can 'find oil faster,' 'recover more oil' and 'reduce the cost per barrel.'"

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nytimes.com/2019/04/10/tec…

We will see market corrections on fossil fuel evaluations, that's coming. @AlexSteffen relayed 14 world banks are saying this is a serious, imminent risk.

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Some experts estimate fossil fuel companies will lose 40-100% of their value in a market correction.

If Amazon is identified as being attached to & dependent on fossil fuels, they will also suffer though not as much. Let's say 5% of a correction cost. That’s a TON of money.

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A non-trivial question is: What are the brand risks? What are public perception risks? Amazon has worked hard to get the brand to a certain level. So much of marketing is avoiding brand damage, of maintain positive perception, while not doing anything that screws it all up.

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Someone has evaluated the value of Amazon's brand as a component of its total value. There are more nonlinear events that are changing public perception that threaten to put a dent in its brand considering its position vis-à-vis fossil fuels and lack of climate leadership.

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What if there were a 20 point shift in public opinion on the climate issue? How would that effect Amazon's brand given it's inaction on climate and partnerships with fossil fuel companies?

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Think giant movements like the student strike movement or @extinctionR. If Amazon became a target because of it's inaction on climate & helping fossil fuel companies "optimize production & profitability" it would certainly lose money. @GretaThunberg #FridaysForFuture

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How does a company reduce its vulnerability? Transition costs don’t get cheaper with delay.

Sure, energy may get cheaper, but there're political changes that might implement charges, fees, carbon taxes, etc which can happen faster than an unprepared company can respond to.

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Markets and politics can happen on a bigger, faster scale than transition can keep up with if a company is behind. For instance, big solar installations shipping from China can take 4 months.

Other expenses that don't get cheaper: the cost to buy expertise.

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There’s financial risk of being caught behind the curve. Will it be more difficult for Amazon to borrow?

What are the competitive disadvantages risks? What are Amazon’s financial risks and transition costs compared to its competitors if it comes to this late in the game?

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Underscore: NONE OF THE RISKS AND TRANSITION COSTS GET BETTER FOR AMAZON BY DELAYING ACTION. There’s no business case argument for delay, if we assume Amazon is going to have to change—and it will. Delaying only increases risk, cost, and vulnerability.

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On the flip side, many parts of transitioning can be made profitable with a broad accounting of the true costs and benefits of transitioning quickly. Clean energy can be profitable. Definitely not expensive even with a company that has a lot of high energy systems.

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Except for planes. But other transportation— EV cars, trucks, etc lead to operational savings. @RockyMtnInst has done a lot of work into the many ways companies can save while decarbonizing.

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What are the maximum risks Amazon has that investors need to know?

Shareholders need transparency on climate stress tests. This kind of mechanism is a big thing being used in Europe right now.

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In Europe, climate stress tests mostly dive into holdings and assets. Ex: "If there were to be a sudden adjustment—a carbon bubble—would you still be a solvent bank if all fossil fuel companies lost 40% of their value?"

But Amazon shareholders need more stresses tested.

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Amazon shareholders and investors need strategic assessment of valuation:

—If there were a carbon bubble and a market adjustment
—If a serious carbon tax was imposed
—If there were a 20 point shift in public opinion on the climate issue

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Again: CLIMATE IS A FUNDAMENTAL, STRATEGIC DRIVER OF AMAZON'S RISKS AND OPPORTUNITIES.

This is an emerging awareness, but now that we understand, we have to act. We must also do these climate stress tests to understand it more clearly.

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An added benefit of acknowledging that climate is a fundamental driver of risks and opportunities: it puts pressure on related industries to acknowledge the same thing. This is happening with real estate investments.

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Real estate investor institutions are having to acknowledge that climate change is a major risk, because someone else has already said it. 2017 saw close to $300B in damages for the real estate industry. The more people admit risk, the more everyone has to.

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Considering all of this, Amazon Board's recommendation “AGAINST” the climate change resolution seems... ridiculous and extremely short sighted.

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Their first sentence in explaining their recommendation against the climate resolution says they agree with the "importance of planning for potential disruptions posed by climate change and on reducing our dependence on fossil fuels"

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sec.gov/Archives/edgar…

But then they follow that sentence saying, "We have a history of commitment to sustainability, through innovative programs such as Frustration Free Packaging..." Really, you're going to lead with... packaging?

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There's clearly a ways to go for Amazon to understand climate as a strategic driver for the business in terms of the very real, near, and significant risks it poses, and also the opportunities it offers.

Investors want transparency wrt these risks and opportunities.

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Before I end, I again want to thank @AlexSteffen for taking the time to chat and share his thinking with me, which this entire thread is based on.

/fin