Understanding and disclosing the impacts and risks of climate change is an issue that has been rapidly rising in prominence in the global financial, political and corporate agenda.
The Carbon Budget
Mark Carney, the Governor of the Bank of England, has emerged as a leading proponent of climate risk disclosure thanks to his understanding of the financial risks of climate change and their potential impact on global markets in the long and short term. These could be shocks and losses from radical changes in energy use and the revaluation of carbon-intensive assets, or of those that depend on the extraction or use of fossil fuels.
Carney has underlined the importance of understanding the ‘carbon budget’ – the amount of carbon that the world can emit before failing to meet our global climate commitments.
If we are serious about keeping warming below 2oC, many fossil fuel reserves will be ‘stranded’: oil, gas, and coal will be unburnable without expensive carbon capture and storage technology. And the value of related stocks and companies and their shareholders – institutional investors, pension funds, mutual funds, etc. – will all be affected. That will in turn impact everybody.
More broadly, to ensure that companies are taking carbon budgets and the risk of climate change seriously there have been many shareholder resolutions put forward to fossil fuel companies, asking them for greater reporting of how they plan to meet global climate commitments or even asking them to put climate experts on their Boards.
There is also increasing pressure from investors and other stakeholders for businesses to understand and disclose the risks and opportunities of climate change for their business. The Financial Stability Board and the G20 formed a Task Force on Climate-Related Financial Disclosures, to develop recommendations for voluntary climate-related financial disclosures targeted at lenders, insurers, and investors.
The Task Force released its final recommendations in June 2017, including four widely adoptable recommendations on climate-related financial disclosures, focusing on governance, strategy, risk management and metrics and targets.
Companies all around the world can also disclose their climate change risks and opportunities voluntarily through the CDP (formerly Climate Disclosure Project), while some will soon be mandated to report their greenhouse gas emissions to their government’s (including in the UK).
Putting a price on carbon
A crucial mechanism for disclosing financial climate risks is for companies to account for the cost of carbon from their operations and products. Putting a price on carbon incorporates climate change impact into business discussion in an unprecedented way.
Putting a price on carbon incorporates climate change impacts as a core metric into the business discussion in an unprecedented way.
Ensuring economic and financial stability is essential to facilitating a smooth transition to a lower-carbon economy. The first step towards this is the recognition that we manage what we measure – and thus of the critical importance of measuring, disclosing, and mitigating climate risk.