Ask the average investor or investment manager if they know how climate change will affect the assets in their portfolio and you’ll likely get a blank stare in return.
How will the rising frequency and intensity of storms, floods and drought impact the operation of companies that grow crops or manufacture food? How will an escalating global price on carbon emissions affect oil sands and pipeline projects?
How could the insurance industry’s response to rising sea levels affect the value of coastal properties?
Bank of England Governor Mark Carney, in a speech for the history books, warned earlier this month that investors aren’t getting answers to those questions because most companies aren’t publicly disclosing enough information about their “climate change footprint.”
This disclosure is urgently needed, argued Carney, if international markets are to make a stable transition to a low-carbon economy, where worldwide emissions of greenhouse gases are kept low enough to avoid dangerous climate change.
“The right information,” Carney said, “will reveal how the valuations of companies that produce and use fossil fuels might change over time. It will expose the likely future cost of doing business, paying for emissions, changing processes to avoid those charges, and tighter regulation.”
Without that information, we’re setting ourselves up for a “Minsky moment” – a sudden collapse of asset value that can trigger a widespread financial crisis. With that information, the market can react as it always has, said Carney, and policymakers can refine their own actions accordingly.
It’s not that carbon disclosure isn’t happening. On the London Stock Exchange, for example, 91 per cent of large listed companies report their annual greenhouse-gas emissions, according to a 2015 stock exchange report from Corporate Knights Capital.
But from there the rate falls to 59 per cent on the Toronto Stock Exchange, 34 per cent on the New York Stock Exchange and 20 per cent on the Nasdaq.
Carney wants to see those numbers improved, but more than that, he wants the numbers to be consistent, comparable and reliable – not just within an industry in a specific country, but globally across industries.
As Carney rightly pointed out, “there are already nearly 400 initiatives to provide such information,” but the “surfeit of existing schemes and fragmented disclosures means a risk of ‘getting lost in the right direction.’”
Creating an industry-led Climate Disclosure Task Force to design and create a single voluntary standard would go far in addressing this problem, and as chair of the international Financial Stability Board, Carney suggested that the G20 should make it happen.
The task force, he added, would also urge companies to outline how they would transition to a world weaned from fossil fuels, and presumably how they would manage other relevant risks from climate change, including resource scarcity, political instability and rising sea levels.
On top of that, he nudged world leaders attending the Paris climate conference in December to give guidance on what a global price on carbon might look like and how it might grow over time. He called it a “carbon price corridor.”
“The price signal itself holds great power,” he said.
Doug Morrow, an associate director of research at Sustainalytics, said Carney’s speech set the right tone but fell short by continuing to talk about voluntary disclosure.
“The limits of voluntary reporting may have been reached,” said Morrow. “Stock exchanges and financial regulators, like the Financial Services Authority and Securities Exchange Commission, are well positioned to impose more binding disclosure measures.”
Requiring mandatory disclosure wouldn’t be a big leap here, particularly for carbon-intensive industries. More than three-quarters of large publicly traded energy and mining companies in Canada report their carbon emissions. Mandating the rest to fall in line wouldn’t likely face much resistance.
That view is echoed by Brian Minns, manager of sustainable investing at Addenda Capital, a subsidiary of The Co-operators that has more than $22 billion in assets under management.
“A regulatory response is in order at this point in time,” said Minns, adding that it should also be applied to private companies, which are missing from popular carbon disclosure initiatives such as the London-based CDP.
But Michael Yow, director of research at Corporate Knights Capital, warned that mandatory reporting won’t work if it’s not applied globally. Imposed on a national basis, it could leave some national stock exchanges at a competitive disadvantage, he said.
Voluntary or mandatory, one thing is certain: Carney has launched discussion of carbon disclosure into the mainstream in hopes of building, in his words, “a smoother transition to a lower-carbon economy.”
– This article is part of a series produced in partnership by the Toronto Star and Tides Canada to address a range of pressing climate issues in Canada leading up to the United Nations Climate Change Conference in Paris, December 2015. Tides Canada is supporting this partnership to increase public awareness and dialogue around the impacts of climate change on Canada’s economy and communities. The Toronto Star has full editorial control and responsibility to ensure stories are rigorously edited in order to meet its editorial standards