Laura Zizzo is founder and CEO of Zizzo Strategy Inc., a Toronto-based management consulting firm focused on climate issues.
The transition to a low-carbon, climate-resilient economy is under way and investors are increasingly demanding to know what boards of directors and their management teams are doing to respond to climate risk. U.S. companies that agree with President Donald Trump's decision to exit the Paris accord cannot escape climate change within their own borders or globally, and risk investor wrath if they remain unprepared for the inevitable.
BlackRock, the world's largest asset manager, is in the middle of a multiyear effort to integrate climate factors into its investments, and is backing it up with votes. It recently joined shareholders voting to demand more climate disclosure by Occidental Petroleum, and also supported a proposal urging Exxon Mobil to report on "the long-term portfolio impacts of technological advances and global climate-change policies," which received 62.3 per cent of shareholder votes at the company's annual general meeting on May 31.
BlackRock understands the impact of climate change, and how it is fast becoming a cost of doing business. The federal government has released details of a federal carbon price and new rules to reduce methane emissions from Canada's energy sector. Ontario's cap-and-trade system is in full swing, raising $472-million in revenue at the first auction.
Other investors and institutions are asking for more transparency on climate risk. Mark Carney, Bank of England Governor and chair of the Financial Stability Board, appointed former New York mayor Michael Bloomberg to lead an industry-led Task Force on Climate-related Financial Disclosures. The TCFD, which includes Swiss Re, JPMorgan Chase, KPMG, HSBC, Unilever, AXA and the Industrial and Commercial Bank of China, has recommended that companies identify climate risk and disclose material impacts in a decision-useful manner. The Canadian Securities Administrators is reviewing climate-related disclosures among Canadian-listed organizations.
According to one recent estimate, 93 per cent of the total U.S. equities market is exposed to material climate-related risks. Banks may be overweight with loans to exposed industries or at-risk properties and not know it. Companies may face significant losses due to stranded assets, such as fossil-fuel reserves that may never be extracted. Consumer-products companies may face serious supply-chain issues due to changing demand and volatile climatic conditions.
Physical assets and day-to-day business operations are already being disrupted by more powerful and more frequent storms, causing more substantial damage. Insurance is getting more expensive and, in some cases, is not available at all. The reduced availability of other critical inputs such as fresh water or productive land can make prices volatile. Remember the spike in the price of cauliflower? North America's already crumbling infrastructure is particularly vulnerable in high-risk geographic locations, such as hurricane-prone and low-lying areas.
The Canadian Chamber of Commerce named climate change as one of its top 10 barriers to competitiveness in 2016, stating bluntly that "Canada is not ready for climate change." The Bank of Canada has warned that inaction could cost $21-billion to $43-billion a year by 2050.
Companies have historically reported on environmental liabilities related to pollution. With the introduction of stricter environmental policies and an expanding understanding of the vulnerability of business, climate risk has evolved from a regulatory nuisance to something investors will demand companies understand, plan for and manage.
Climate risk factors are not easily captured in a balance sheet and various initiatives are under way to shed light on these issues and uncover best practices. The UN Environment Programme Finance Initiative, Principles for Responsible Investment and Generation Foundation launched a three-year program to help investors understand how and why climate-change and sustainability considerations must be integrated into management decisions as part of companies' fiduciary duties.
Assessment tools are being developed, such as the climate-change index series, which was launched by S&P Dow Jones Indices and the Toronto Stock Exchange last fall. Accounting standards and generally accepted principles will also have to adapt. The Prince of Wales Accounting for Sustainability project is bringing together chief financial officers from around the world to "drive a fundamental shift toward resilient business models and a sustainable economy." Investors will use these tools to identify and move money away from carbon-intensive assets, and toward climate-resilient ones. The TCFD's recommendations and an endorsement by the FSB will put further pressure on companies.
With substantial international investor attention focused on climate change, climate risks will begin to move markets. Are you ready?