A firefighter holds a water hose while battling a blaze in Santa Rosa, Calif. (Marcio Jose Sanchez/AP)

On Tuesday, Pacific Gas and Electric (PG&E) — California’s largest utility and one of the United States’ largest investor-owned electric utilities — filed for bankruptcy. It claimed that bankruptcy was its “only viable option” because of liabilities arising from numerous California wildfires that some, including a federal judge, have traced to the company’s power lines.

Most scientists agree that global warming worsened the effects of the decade-long drought in California, making it more likely that each errant spark could cause unprecedented damage. PG&E did too little too late to manage this growing risk, and it is far from alone. As we explain below, PG&E’s crisis is just one example of how climate change is creating massive risks for U.S. corporations.

Corporations haven’t taken proper account of global warming

PG&E’s bankruptcy is a symptom of a more general problem: Corporations haven’t priced in the consequences of global warming. A recent study in the journal Nature Climate Change shows that corporate expectations for current and future spending on the management of physical risks from climate change are off by two orders of magnitude. Companies and investors are still drastically underestimating the risk that climate change poses to both their infrastructure and their underlying assumptions about economic prosperity.

Indeed, PG&E arguably paid more attention to climate change than most U.S. companies. PG&E has done perhaps more than any other U.S. utility company to decarbonize its energy supply. It invested heavily and early in both renewables and energy efficiency. It played an active role in California’s landmark carbon market. And after years of documented violations and slippery dealings with fire and vegetation maintenance across its service area, PG&E appeared to be trying to turn around its infrastructure safety record. In 2017, the Carbon Disclosure Project, a well-regarded framework for corporate reporting on environmental and social issues, gave PG&E the highest mark received by any utility for its voluntary disclosures of its own climate risks.

Analysts are bad at measuring the risks

The problem was that PG&E thought of risk in ways that are out of touch with the nature of the problem. In its most recent, federally mandated financial disclosure, PG&E detailed the company’s exposure to pending lawsuits and its efforts to fix fire risks from its equipment. It did not project its ongoing exposure to future “environmental risks” from climate change — the physical cause of its underlying liability. Instead, its plan for reducing the risks of climate change to its bottom line was to lobby to change the rules that hold the company accountable. This in part reflected peculiarities of California law, which increased PG&E’s liabilities, but it is still notable that regulatory risks trumped physical ones.

This issue is not isolated to PG&E. Wall Street analysts see “climate risk” as mostly involving the regulatory and competitive risks a company faces if and when government puts a price on carbon. Yet the physical risks are already here. In 2017, prominent climate scientists argue, overly warm seas helped produce super-powered hurricanes that caused $220 billion in damages to the U.S. economy, only $80 billion of which was insured. Meanwhile, wildfires from 2017 and 2018 have caused more damage than the previous 30 seasons combined. The most recent Camp Fire alone caused a devastating $16.5 billion in losses. Scientists indicate that in the near to medium term, things are only going to get worse.

Despite the human suffering, property damage and mounting expense of climate-fueled destruction, financial analysts still don’t give physical risks as much consideration as the mere idea of government action on carbon pricing. Estimates of the global costs of climate impacts to manageable assets this century range from $4.2 trillion to $43 trillion dollars. But comparing disclosures of corporate adaptation strategies from roughly 1,600 of the world’s largest companies, the recent analysis from Nature Climate Change found that companies plan to spend only tens of billions of dollars to deal with these costs. The accounting obviously does not add up. Additionally, many corporate costs likely linked to climate change — increases in the price of insurance and raw materials or, in the case of PG&E’s energy suppliers, imperiled purchaser contracts — go unreported as such.

PG&E’s problems on capital markets suggest that investors are changing their view of the risks of global warming. If companies are exposed to unusual risks from unusual weather, reasonable investors can be expected to want to know what companies are doing about it. Perhaps this episode will reinforce calls for mandatory disclosure of physical risks from climate change, which would provide investors with more reliable and systematic information than the current piecemeal and voluntary approach to reporting.

Ian Gray is a PhD candidate in sociology at the University of California at Los Angeles. He studies how organizations evaluate and adapt to climate change.

Gretchen Bakke is a professor of anthropology at Humboldt University in Berlin and the author of “The Grid: The Fraying Wires Between Americans and our Energy Future” (Bloomsbury 2016).