The huge threat to the economy has become clear
Climate change is already hitting profitability. We hear about stranded assets, when fossil fuel reserves are no longer considered worth extracting. Investors are worried about costs associated with extreme weather events and other environmental damage. Meanwhile, energy prices are being driven down by the burgeoning renewables sector. Also, businesses are having to pay rising premiums for insurance against flood risk and there are concerns that vast areas of the economy will become uninsurable if the current emissions trajectory continues. And there are legal moves to hold some businesses to account for knowingly damaging the climate - see Grantham Research Institute's database on climate litigation. Find a good overview of the issues seen from business perspective here.
According to the UNEP's Emissions Gap Report 2019, carbon emissions need to peak by 2020 to keep global warming to 1.5 degrees. But carbon emissions are still rising and are unlikely to peak even by 2030. If we do not respond to climate change in a managed way, then there are serious risks to the financial sector including:
Business has failed to respond
Over the last few decades, businesses have taken various approaches to improve their environmental profile and to report environmental performance in Environmental, Social and Governance statements; but changes have often seemed cosmetic and business has largely carried on as usual.
To some extent, the inadequate response of business is due to the economic environment in which they exist. This includes:
The financial sector is key
When decisions are made about whether to invest in projects and businesses, assessments are done to ensure that money is spent wisely. Traditionally, assessments have focussed primarily on the financial performance of a business. Businesses have a legal duty to make sure that financial reports include the right details and that the information is robust. The existential risk from climate change means that climate reporting has to become as central to investment decision-making as financial reporting. However, the tricky bit is how to do this.
Problems with comparing environmental performance
An assessment of environmental performance should measure an organisation's vulnerability to climate change, its plans for transitioning to a low carbon world and its ability to exploit new opportunities. However, there are different sorts of environmental impact and organisations need to be assessed in different ways according to things like their structure, industry sector, size and geographical location. Finding one overall way of comparing climate performance has been problematic due to:
• the sheer variety of comparison methods used - making it difficult to compare companies
• little verification - environmental statements are not robust
• shortcomings - metrics often look at what is happening now, not whether the right plans are in place for the low carbon future
• inconsistency between words and actions - company actions may not always reflect environmental statements
• lack of management responsibility for environmental performance - environment has not been a priority and is often side-lined
There has been some progress towards standardising how environmental information is reported through the Global Reporting Initiative (GRI) , Climate Disclosure Standards Board (CDSB) and the Global Compact. However, a more universally accepted, verified and ultimately legally binding standard was needed. Probably the most promising initiative at present is the G20's Taskforce on Climate-related Financial Disclosures ("TCFD"). This imposes a framework for reporting (metrics, governance, strategy, risk) above existing reporting methodologies.
Problems with lobbying
Organisations often need government to put in place the right incentives and legislation to help them to transition. However, if there is heavy lobbying against real change, this can make government reluctant to act. This lobbying is frequently by industry associations, which are funded by the same businesses that say they want government action in their environmental statements. When this inconsistency is pointed out, businesses have claimed that they are not responsible for their industry associations.
There is a way forward
The business sector has concluded that climate impacts must be properly assessed to protect the long-term value of the economy, business and investment. This requires concerted action, so that the reluctance of businesses to respond to climate change is overcome and so that transforming to a low carbon, climate-resilient business model becomes the norm. This is beginning to happen.
These initial steps show promise, but a lot remains to be done to make sure we avoid dangerous climate change. The financial sector has to make sure that businesses are taking firm action and quickly. Governments have to take the right policy decisions. And civil society has to keep the pressure on governments, investors and business to address inconsistencies and to spur on more fundamental change.
Climate change is already hitting profitability. We hear about stranded assets, when fossil fuel reserves are no longer considered worth extracting. Investors are worried about costs associated with extreme weather events and other environmental damage. Meanwhile, energy prices are being driven down by the burgeoning renewables sector. Also, businesses are having to pay rising premiums for insurance against flood risk and there are concerns that vast areas of the economy will become uninsurable if the current emissions trajectory continues. And there are legal moves to hold some businesses to account for knowingly damaging the climate - see Grantham Research Institute's database on climate litigation. Find a good overview of the issues seen from business perspective here.
According to the UNEP's Emissions Gap Report 2019, carbon emissions need to peak by 2020 to keep global warming to 1.5 degrees. But carbon emissions are still rising and are unlikely to peak even by 2030. If we do not respond to climate change in a managed way, then there are serious risks to the financial sector including:
- dangerous climate change (2 degrees or more) causing widespread economic damage
- instability, with sudden drops in the value of assets, as has been happening with the oil price
- organisations failing to take opportunities in the new green economy
Business has failed to respond
Over the last few decades, businesses have taken various approaches to improve their environmental profile and to report environmental performance in Environmental, Social and Governance statements; but changes have often seemed cosmetic and business has largely carried on as usual.
To some extent, the inadequate response of business is due to the economic environment in which they exist. This includes:
- Short termism - large businesses are generally run by managers and owned by investors, looking for a short-term return.
- Environmental damage is often not paid for by the perpetrator - if reducing environmental damage is just a cost, investors favour organisations not spending this money.
- Individual cost versus the collective good - it often makes commercial sense for individual companies to carry on with business as usual. However, it would be economically disastrous if every organisation did this, as profits would be eaten up by having to deal with the consequences of climate change.
The financial sector is key
When decisions are made about whether to invest in projects and businesses, assessments are done to ensure that money is spent wisely. Traditionally, assessments have focussed primarily on the financial performance of a business. Businesses have a legal duty to make sure that financial reports include the right details and that the information is robust. The existential risk from climate change means that climate reporting has to become as central to investment decision-making as financial reporting. However, the tricky bit is how to do this.
Problems with comparing environmental performance
An assessment of environmental performance should measure an organisation's vulnerability to climate change, its plans for transitioning to a low carbon world and its ability to exploit new opportunities. However, there are different sorts of environmental impact and organisations need to be assessed in different ways according to things like their structure, industry sector, size and geographical location. Finding one overall way of comparing climate performance has been problematic due to:
• the sheer variety of comparison methods used - making it difficult to compare companies
• little verification - environmental statements are not robust
• shortcomings - metrics often look at what is happening now, not whether the right plans are in place for the low carbon future
• inconsistency between words and actions - company actions may not always reflect environmental statements
• lack of management responsibility for environmental performance - environment has not been a priority and is often side-lined
There has been some progress towards standardising how environmental information is reported through the Global Reporting Initiative (GRI) , Climate Disclosure Standards Board (CDSB) and the Global Compact. However, a more universally accepted, verified and ultimately legally binding standard was needed. Probably the most promising initiative at present is the G20's Taskforce on Climate-related Financial Disclosures ("TCFD"). This imposes a framework for reporting (metrics, governance, strategy, risk) above existing reporting methodologies.
Problems with lobbying
Organisations often need government to put in place the right incentives and legislation to help them to transition. However, if there is heavy lobbying against real change, this can make government reluctant to act. This lobbying is frequently by industry associations, which are funded by the same businesses that say they want government action in their environmental statements. When this inconsistency is pointed out, businesses have claimed that they are not responsible for their industry associations.
There is a way forward
The business sector has concluded that climate impacts must be properly assessed to protect the long-term value of the economy, business and investment. This requires concerted action, so that the reluctance of businesses to respond to climate change is overcome and so that transforming to a low carbon, climate-resilient business model becomes the norm. This is beginning to happen.
- Action is now being taken, led by alliances of investors, banks, insurance companies, stock exchanges, the UN and other global organisations, as they become increasingly alarmed by the threat climate change poses to the economy
- Guidance is being put in place to make environmental performance reports comparable and verifiable, in the form of Climate-related Financial Disclosure (CFDs) and other standards
- There are moves to turn this guidance into a legal requirement
- The largest polluters are being targetted - pension companies & other large investors are now insisting that these businesses put in place robust environmental reporting, setting out plans for transformation
- There has been a slew of announcements from some of the world's largest polluters about their plans for transformation, including from Shell and BP
These initial steps show promise, but a lot remains to be done to make sure we avoid dangerous climate change. The financial sector has to make sure that businesses are taking firm action and quickly. Governments have to take the right policy decisions. And civil society has to keep the pressure on governments, investors and business to address inconsistencies and to spur on more fundamental change.
FURTHER INFORMATION
Forbes
'A 2°C World Might Be Insurable, A 4°C World Certainly Would Not Be'
https://www.forbes.com/sites/dinamedland/2015/05/26/a-2c-world-might-be-insurable-a-4c-world-certainly-would-not-be/?sh=4bdfe3102de0
Grantham Research Institute
database on climate laws, policies and litigation cases globally
https://climate-laws.org/
The Atlantic Council's "Climate Finance Partnership"
the need to speed up investment in mitigation, adaption & renewables
https://www.atlanticcouncil.org/blogs/energysource/the-climate-finance-partnership-mobilizing-institutional-capital-to-address-the-climate-opportunity/
UNEP's Emissions Gap Report 2019
https://wedocs.unep.org/bitstream/handle/20.500.11822/30798/EGR19ESEN.pdf?sequence=13
TCFD
https://www.fsb-tcfd.org/
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