Investors are demanding more than financial records these days.
Climate risks; sustainability; demands for a lower carbon footprint; impacts of climate change on productivity, employment, and society; are all being examined under a new environmental lens of accountability by investors and shareholders.
In its recent June 2019 Status Report, the Task Force on Climate-related Financial Disclosures (TCFD) emphasizes that because of the UN’s urgent call for people and businesses alike to make changes to meet the Paris Agreement goals, “governments and private-sector entities are considering a range of options for reducing global emissions, which could result in disruptive changes across economic sectors and regions in the near term.”
According to the report, “Companies that invest in activities that may not be viable in the longer term may be less resilient to risks related to climate change; and their investors may experience lower financial returns.”
Two years ago at this time, the TCFD released recommendations which provided a framework for companies and other organizations to develop more effective climate-related financial disclosures through their existing reporting processes (See: https://www.fsb-tcfd.org/publications/).
Some companies thought “What a great idea!” and implemented changes immediately. Others dismissed the concept, thinking perhaps that climate change was more of a long-term consideration.
Well the future is now.
Shareholders and investors are holding businesses accountable. According to “Show Us Your Climate Risks, Investors Tell Companies,” a February 28, 2019 Wall Street Journal article by Gabriel T. Rubin, “Companies are projected to face a record of 75 or more climate-related shareholder proposals. This is up from just 17 in 2013, according to ISS Analytics, the data-intelligence arm of Institutional Shareholder Services.”
This is supported by an article from Mathew Nelson at EY Global Climate Change and Sustainability Services, who says that in addition to traditional finances, investors are scrutinizing a company’s environmental, social and governance (ESG) risk: “Investors report that, governance aspects aside, the main ESG factors in investment decision-making are related to supply chain, human rights and climate change risks. ESG has now become integral to the investment decision-making process and that is not going to change.”
Investors are demanding answers to questions such as:
- How is the business preparing for a lower-carbon economy?
- Is the company prepared for climate-related storms, tornados, floods, etc. to disrupt the supply chain, slow productivity, or challenge existing resources?
- What is the business doing to lessen its climate-change impact on society?
A Need for Standards
Climate risk reporting is definitely on the table. However mainstreaming the data into capital markets isn’t quite ready for prime time. The entire process requires a serious standardization overall before the information can be useful.
Emissions reported in different units or format, for example, can sound extremely good or bad depending on their presentation. This makes it nearly impossible to establish comparisons or to identify trends.
By the end of the year, the European Commission is expected to issue standardized non-financial reporting requirements using, in part, the TCFD guidelines.
In the United States, however, the need for climate disclosure doesn’t seem as urgent for some. Traditional energy-based companies seem to have an ally with the Trump administration and its appointees to the Securities and Exchange Commission.
David Hasemyer wrote in “Inside Climate News” that investors are actually worried about the “fossil-fuel sympathizers” inside the SEC. “Nearly two-thirds of the climate-related shareholder resolutions filed with publicly held energy and utility companies this year have been contested before the U.S. Securities and Exchange Commission…” In 2019 alone, the SEC has sustained 45% of the challenges, the highest percentage in the last five years, according to the article.
But this is only in the United States. Internationally, the Paris Agreement is still the Holy Grail of environmental responsibility.
It is only a matter of time when standardized climate-related risks and opportunities will become a natural part of a company’s risk management and strategic planning processes. That is if they want shareholders and savvy investors. One might as well get started today.