The impacts of nature-related risks on corporate chemical waste

Nature-related risks are increasing worldwide due to unprecedented impacts of human activities on the natural environment. While, the occurrence of extreme weather events or natural disasters hits society and the economy, the subsequent behaviour of affected individuals or organizations in turn affects the likelihood of future nature-related risks materializing. Firms are at the centre of this nature-related risks cycles with their exposure to the materialization of nature-related risks and their own impacts on the environment. Understanding their reactions towards extreme weather events and natural disasters is key, if we are to combat climate change and nature loss effectively and support firms in their adaptation and mitigation strategies. In this paper, we analyse how firms respond to extreme weather events or natural disasters and distinguish two types of nature-related risks: chronic physical risk in the form of droughts and acute physical risks in the form of hurricanes. We assess firms’ reactions to these events through their polluting behaviour based on site-specific information on chemical waste from the U.S. Toxic Releases Inventory (TRI) Programme. Our findings show that the effect of severe droughts on chemical waste is marginal and that there is no effect of hurricanes on sites that are directly on the hurricane route. However, we observe strong shifts in polluting behaviour. Firms tend to shift from offsite waste to onsite waste during extreme droughts. This offsite waste is more often released rather than being recovered or recycled. Sites that are in the vicinity of the hurricane tend to increase their pollution. Our results suggest that on average firms tend to increase pollution after experiencing extreme weather events or natural disasters. Firms tend not to reconsider their activities and rather increase externalities that in turn support future extreme weather events of natural disasters. Our results are important for insurance companies and investors that wish to price nature-related physical risks and for central banks and regulators that seek to understand cycles of nature-related physical risks.