Editorial note: If, like many Brazilians, you were on holidays for most of January, you might have missed two important international summits of relevance for climate and energy. Luckily for you, CleanTechnica was there to cover them while you were out and about on your first full-electric road trip (or whatever you happened to be up to).
The two summits were the annual meeting of the World Economic Forum (WEF) in Davos and the 2016 Investor Summit on Climate Risk in New York. The first was a great way to gauge the reaction of the business community to the climate deal signed in Paris at the end of December. The second was key to testing the waters on the investment side of the picture in the wake of the two aforementioned events. The piece below deals with a central piece of the investment picture, namely the critical role of disclosure in driving investments. For the piece on Davos, click here.
“When we did the first investor summit on climate risk in 2003, discussions about climate change as a financial risk and a fiduciary issue was a strange notion. Today, there is no question this is one of the largest financial risks of our time,” Mindy S. Lubber, President of CERES, told CleanTechnica.
The investor summit on climate risk her organization helped convene last week at the United Nations in New York drew more than 500 investors representing some $22 trillion of assets under management.
That the event was oversubscribed was no surprise. Two of the top 3 global risks identified by the WEF this year are climate related, and investors are increasingly getting warned of the physical, liability, and transition risks associated with climate change.
Just as importantly, the transition called for by COP21 cannot happen without the investor community. “The climate of disclosure has changed so much that there is no going back,” says Lubber. “Investors cannot make a decision anymore without that information, and regulators are seeing it.”
Lack of transparency over the environmental performance of companies and their exposure to climate risks remains problematic, however. Nearly two-thirds (63%) of the world’s largest companies do not report on their GHG emissions, according to a survey of the largest stock exchanges by Corporate Knights Capital. And even when they do report, quality is not always there. According to a recent study by CERES and CookESG Research, of the oil and gas companies that reported, some simply copy/pasted the same vague language every year, in effect providing no information to investors whatsoever.
To make matters worse, “of the 23 oil and gas production and extraction companies on the S&P 500, disclosing a collective 77 billion barrels of oil equivalent in reserves as of the end of 2014, not one discussed the likelihood and potential impact of an international agreement to limit global warming,” Jackie Cook of CookESG Research told CERES.
There are least three reasons why this alarming. First, the timelines set by the Paris agreement are extremely tight. Not only did governments note the “urgent need” to get pledges on track with a 2°C scenario; they also committed to achieving a net-zero carbon economy by 2050. Achieving that goal will require action on shorter time horizons than the 2050 target might suggest. “If you were thinking 2030, 2050, erase that. The target is now 2020,” Christina Figueres reminded investors at the summit. If anything, the aforementioned research suggests a severe lack of planning on the part of one of the sectors most impacted by the energy transition involved.
Second, the revenue at risk resulting from a move towards a 2°C trajectory could be as high as $34 trillion from 2014–2040 for fossil fuel companies, with oil alone accounting for $22.4 trillion, according to recent research by Barclays. If the absence of planning exposes companies to transition risk, the absence of disclosure essentially transfers some of that risk to investors.
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Last but not least, as Barclays’ Managing Director of research Mark Lewis pointed out, “even if we do not get on a 2°C trajectory within the next five years, the policy framework will only tighten in the future.” Investors and companies, he argued, should thus start stress-testing their investments much more aggressively than they have in the past.
Some have already started on that journey. Under the Montreal Carbon Pledge (MCP), for instance, over 120 investors representing more than $10 trillion of assets under management have committed to disclose the carbon footprint of their investment portfolio. AXA also announced it will stress-test its portfolio to a 2°C scenario in 2016.
One interesting finding from the MCP is that, much like the government side of the picture, it is often the case that only a few actors account for a large part of the emissions. CalPERS, for instance, found that half of its investment footprint came from just 80 companies (out of 10,000 invested in the portfolio). This limited number of key actors provides a unique opportunity for pension funds to engage with these ‘large emitters’ and pressure them to clean up their act.
Another important area of action will be regulation, notably the requirement that listed companies disclose their climate risks. This is already happening in some markets, with the UK requiring mandatory disclosure of greenhouse gas emissions for companies listed on the London Stock Exchange, for example.
However, as Michael Yow, lead analyst at Corporate Knights Capital, notes, “legislation is a good incentive but it isn’t complete unless legislation is carefully enforced.” While this has been an issue in the past, recent actions by the New York attorney general against companies like Peabody Energy or ExxonMobil for their lack of disclosure on climate-related risk, as well as pressures by investors on securities exchange commissions, might be a sign of changing tides. “Because Paris has sent such an important capital market signal, financial regulators like the SEC have to look much more closely at climate disclosure filings of regulated companies. I think we’ll start to see more enforcement actions for poor disclosure,” Lubber told CleanTechnica.
Meanwhile, it will be important to develop clear standards on what exactly constitutes a climate-related financial risk. “Rules have to be specific,” notes Yow. “Saying ‘a company needs to report on sustainability’ without saying what to report does not work.”
A particularly noteworthy development in this regard was the launch, in Paris, of an international effort to develop standards for disclosure of climate-related financial risks under the G20’s Financial Stability Board (FSB).
This industry-led task force, chaired by former mayor Michael R. Bloomberg, will seek to “develop a set of recommendations for consistent, comparable, reliable, clear and efficient climate-related disclosures.” While sustainability reporting indicators have been developed before, this is the first time that an international financial regulatory body has played such a direct role in ensuring there is accurate information to properly assess and price climate risk.
“Our expectation is that what comes out of the FSB will be strong definitions and clarifications on why climate risk is a fiduciary issue and a material risk that applies to all industries, not just the fossil fuel industry,” Lubber said. The standards are to be delivered by end of the year.
Videos from the investor summit can be found here.
Images via Ceres