As global warming spawns new regulations, technological remedies, and shifts in consumer behavior, its effect on the valuations of many sectors and companies is likely to be profound. The shocks to some industries could be severe—potentially as severe as, for example, the effect of the introduction of wireless telephony on the telecommunications sector during the 1990s and of shifting oil prices on the oil and gas sector during the 1970s and 1980s. Yet executives have so far paid scant attention, either because they don’t understand the effects of climate change on their businesses or they believe them to be too uncertain or distant to model.

To gauge, even at this early stage, the stress that climate change will place on the cash flows of large public companies, we assessed the impact of a series of carbon mitigation scenarios on benchmark companies in six sectors.¹ The change in cash flows—compared with a business-as-usual scenario, but without explicitly considering the responses of individual companies over time—indicates how much pressure efforts to reduce carbon emissions will exert on valuations and how much volatility a sector’s current business systems will face. Such an analysis cannot, however, predict the actual impact on cash flows,...