Flood damage erodes companies’ long-term value

If flood is allowed to disrupt your business, your stock value could drop significantly in the next 12 months, reflecting investors’ shaken confidence in your company’s managerial decision-making.

That is according to a new analysis commissioned by FM Global and conducted by analytics firm Pentland Analytics. The study examined 71 of the world’s largest publicly traded companies, all of which reported financial damage from a major flood event in recent years. Twelve months after those flood losses, their shareholder value had declined by an average of 5%, equivalent to a collective $82 billion.

The fall in prices reflect investors’ lowered expectations of future cash flow – not the cost of the flood damage itself.

“The decline in shareholder value for the analysed companies highlights that flood risk preparedness is a sound approach to preserving value. Making smart choices and investments in site selection, emergency planning, structural reinforcement, elevation of critical machines and equipment, as well as the use of flood barriers can help build resilience,” said Paolo Larentis, senior engineering risk and natural hazards specialist, FM Global.

“For companies seeking to be more resilient, and who have vulnerable locations and facilities in the UK, it is critical to take steps now to reduce flood risk ahead of the wet autumn and winter seasons. As the storms Desmond, Eva and Frank demonstrated in 2015, property damage and resulting business interruption from flooding can be severe.”

According to Dr. Deborah Pretty, founder of Pentland Analytics, “Investors increasingly consider flood-related property loss and business disruption as bad management rather than bad luck. Investors evaluate the disruption caused by flood and anticipate the long-term harm to corporate reputation, market share and growth ambitions. They reassessed the future of these disrupted companies and it was 5% worse. That would seem to dwarf the cost of investing in flood protection.”