There has been mounting pressure on the financial sector to recognise and factor climate change risk into investment ratings in a move that would monetise the impact of climate change, encourage corporate environmental responsibility and safeguard the global economy against destabilising climate-related issues.
Organisations like CDP, formerly the Carbon Disclosure Project, have been lobbying for greater transparency from companies about their vulnerability to climate change and their environmental impact in the hope that potential investors will use this information to capitalise on sustainable development and help to decarbonise the global economy.
Backed by 830 institutional investors with assets of $100 trillion, CDP puts these insights at the heart of strategic business, investment and policy decisions. More than 5,800 companies disclosed environmental information through CDP in 2016.
The movement does appear to be gaining traction with the commitment of 28 members to the UN Environment Finance Initiative’s Portfolio Decarbonisation Coalition (PDC), who control over $3 trillion in assets between them and have pledged to decarbonise a total of $600 billion by designing investment portfolios with a smaller climate change impact.
“We are seeing significant international collaboration among leading asset owners to push on climate issues,” said Lance Pierce, President of CDP North America and one of the PDC organisers.
“Climate change is requiring transformational changes in the economy in order to safeguard assets and supply chains, and presents a significant economic growth opportunity. The US renewable energy sector employed 769,000 people and the solar industry grew 12 times faster than overall job creation in 2015. Investors are realising they can reduce carbon, reduce risk and generate steady financial returns as well as jobs.”
By withdrawing capital from carbon-intensive companies and technologies and re-investing that capital into carbon efficient companies of the same sector, investors provide a strong incentive for other companies to follow low-carbon initiatives.
“Investments with more carbon translate to higher risk, not just from potential carbon fees or pricing, but also from shifts in technology that can leave high carbon assets stranded,” said Erik Solheim, Head of UN Environment.
“The success of the Portfolio Decarbonisation Coalition is a clear signal to both governments and companies that climate change, and the corporate response to it, is critical to shareholder value and investor interests going forward.”
In December, coordinated by Labour’s shadow international climate change secretary Barry Gardiner, an international alliance of 100 MPs from 34 countries wrote a letter to the world’s stock exchanges to encourage them to factor in the financial risks of climate change.
Gardiner believes that transparency measures must be put in place to provide investors with the information to take into account environmental developments and for the financial markets to respond appropriately to such risks.
“The risks climate change poses to our financial systems are clearer than ever. The world’s financial systems are only just beginning to focus on the threat to pension funds and other investors from stranded assets and supply chain risks,” said Gardiner.
The letter calls on the stock markets to “promote the adoption of climate-related reporting guidance and disclosure for all listed companies under [their] jurisdiction” and to “commit to implement best international practice in reporting requirements for sustainability and climate-related risks”.
Green party co-leader Caroline Lucas, former Labour leader Ed Miliband, shadow frontbencher Clive Lewis and former climate change secretary Caroline Flint also signed the letter.
Already facing the harsh reality of excess human emissions and quickly becoming a world leader in clean energy, the Chinese president Xi Jinping announced at this year’s financial summit in Davos, that China invested $88 billion in renewable energy in 2016.
Also exploring other innovative ways to fund their low carbon transition, The People’s Bank of China has proposed the mandatory disclosure of climate-related financial risks as part of reforms to make its banking system sustainable.
The G20’s Task Force on Climate-related Financial Disclosures co-chaired by former New York Mayor Michael Bloomberg and Bank of England Governor Mark Carney has also recommended full and standardised disclosure by companies and investors of financial risks and opportunities from climate change in a recent report of recommendations.
“The challenge is that investors currently don’t have the information to respond to these developments,” Carney and Bloomberg co-wrote in The Guardian. “This must change if financial markets are going to do what they do best: allocate capital to manage risks and seize new opportunities. Without the necessary information, market adjustments to climate change will be incomplete, late and potentially destabilising.”