Trying to get financially orientated people to pay attention to the very real but immensely long-term risks of climate change can be an uphill struggle, says Jane Fuller
This article was first published in the March 2017 UK edition of Accounting and Business magazine.
In the wake of the financial crisis, the international Financial Stability Board (FSB) set up a taskforce to look at climate-related financial disclosures.
The taskforce’s report, published last December, provides a one-stop shop for those bewildered by the array of climate and carbon-related disclosure initiatives. It uses language that financial people understand, breaks down risk into manageable categories, discusses energy cost savings and considers how to make money on new products.
It tackles not just what companies should disclose about their mitigation of climate-related risks, but also what investors and lenders should take into account when funding those companies. On strategy alone, the detail runs to scenario planning for a two-degree Celsius increase in global temperatures.
But hang on a minute. When are these risks going to hit most businesses? The Paris agreement on climate change, which came into force last November, aims to keep the global temperature rise this century below two degrees. This century! Compare this with a typical five-year horizon for business planning, including such agenda-toppers as the impact of Brexit on exporters and technology-driven entrants to various markets.
Meanwhile, climate change (as opposed to extreme weather, which is not new) has yet to register as a direct cause of profit warnings. Changes in fossil fuel prices do affect profitability in some sectors, but the massive swings over the past two years are not correlated with the gradual pace of climate change. Indeed, the irony is that the FSB taskforce reported at the end of a year in which the share prices of many coal companies at least doubled.
Investors can make money in sprints as well as the marathon of long-term ownership. Some, typically pension funds, get a high rating from the Asset Owners Disclosure Project (AODP) for managing exposure to climate risk. But about half of the 500 funds in the AODP index ‘appear to be doing absolutely nothing’.
The trade-offs are difficult. In ratifying the Paris agreement, the Indian government’s provisos included ‘provision of basic needs for all its citizens… on the assumption of unencumbered availability of cleaner sources of energy’.
There is a hierarchy of climate change urgency among countries, businesses and investors. The closer you are to producing and using fossil fuels, the greater the risks. Investors who care can either encourage companies to clean up or avoid exposure to greenhouse gas emitters. These decisions are creeping into the mainstream, but can be crowded out by more immediate concerns.
The FSB’s approach helps to fit consideration of climate change into strategic thinking and risk management. But its clearest metrics deal only with measurable emissions. Predicting the impact on asset values is much harder.
The best suggestion I have heard is to apply a discount to the multiple used in calculating the terminal value of a climate-challenged business. That idea came from an accountant. It shows the extent to which those focused on climate change need to appeal to the head as well as the heart.
Jane Fuller is a fellow of CFA UK and serves on the Audit and Assurance Council of the Financial Reporting Council