Addressing the COP21 conference in Paris last week, Al Gore, the former US Vice President, said the main issue on climate change was not if we needed to change financial course, but whether we could. Importantly, this requires climate change to be clearly measurable, translatable to accounting/reporting standards, and for investors to have the economic incentives to act on this information.
The appointment – also at COP21- of Michael Bloomberg, former Mayor of the City of New York, to chair the Financial Stability Board’s (FSB) new industry-led disclosure taskforce on climate-related financial risk, will be key to this, but more of that anon.
Gore, the climate optimist, believes we are already tipping forward on green economics. One example, he said, was a newly published Goldman Sachs broker report that wind turbines and solar panels will provide more energy over the next five years than U.S. shale-oil production has over the past five. He posited this against the demand fall that should ensue in certain brown fuels as the energy mix changes and carbon ‘budgets’ are weighed up in the light of tightening environmental regulation; just how tightly we will see at the end of the Paris conference.
As a result, investors, he said, need to look closely at the potential for the ‘stranding’ of fossil fuel assets.
Such thinking, it must be said, is, at present, the preserveof the largest, best informed and politically high-profile investors. COP21 was noticeable for their number in attendance, and high on the programme agenda. That is a serious boost, particularly when they are being courted for their money by politicians. Outside of that, sadly, it’s still business-as-usual for most in the investment world, and that business doesn’t look at climate much.
But the mood music is changing, as are the metrics, and there are signals that should have laggards soon paying attention.
Firstly, corporate resistance to environmental pricing is weakening and becoming competitive. Oil majors like BP and Total are now ‘requesting’ governments to set a price on carbon.
CDP says over 1000 companies disclosing their C02 emissions levels to it this year said they were already implementing internal carbon prices, often $40 or higher.
Secondly, policy IS tightening, even without COP21. CDP says existing carbon pricing schemes (EU ETS, Indian Coal tax, US states, and Canadian provinces) and planned schemes (Chinese ETS, US Clean Power Plan implementation), means it expects that countries representing over 90% of G20 GDP will have pricing by 2018.
Thirdly, the recognised channels of financial risk and expectation are moving, notably in the powerful bond markets.
During COP21, Moody’s, the credit rating agency, put out research on the credit implications of government policy initiatives globally and rising corporate innovation and investment. It said: “This heightened attention will lead to disruptive industry change, shifting investor capital allocation strategies and rising input costs related to increased pricing on carbon emissions and water usage.”
Standard & Poor’s Ratings Services (S&P) has warned that climate change will be a significant factor in sovereign credit ratings and is already putting them under downward pressure, hitting countries’ economic growth rates, their external performance and public finances.
That’s real money, measured.
Much more attention though is needed to the actual and expected levels of carbon prices, which in turn is the key to unleashing the trillions of dollars of necessary green energy infrastructure and technology.
Which is where Michael Bloomberg comes in.
Mark Carney, the Governor of the Bank of England and Chair of the FSB, told the COP21 conference that the FSB’s role is to ensure global financial markets are able to fully account for and represent the risks that politicians are discussing around climate, and, enable investors, should they wish, to potentially amplify the success of policy decisions by investing to back them.
But he noted that it was not just a question of ‘what gets measured gets managed’, but also how that management is reported, including questions of whether company strategies are in line with reported national INDCs (Intended National Determined Contributions) and/or an eventual net carbon zero world.Bloomberg’s Task Force on Climate-related Financial Disclosures (TCFD) will develop voluntary, consistent, climate-related financial risk disclosures for use by companies in providing information to lenders, insurers and investors. It’s a much needed centralisation effort, given that there are, according to some estimates, more than 400 such reporting frameworks around the world at present.
Much more work also needs to be done on comprehensive measurement and benchmark comparison of GHG emissions, as well as some form of clear – dare we say mandatory – reporting, if these are to be credible. Bloomberg’s involvement with the US Sustainability Accounting Standards Board (SASB) (he is on the board) will be instructive. SASB, a non-profit organisation that has worked with major companies and investment firms to develop ESG reporting standards for 80 industries in 10 sectors based on clear, financially ‘material’ information that companies believe investors (and the public) need to know, and which would slip into the existing FASB US financial reporting framework.
Carney’s appointment of Bloomberg is also a PR coup, given the branding link to markets data.
Things should move quickly. During the first stage of its work, the Task Force will consist of 10 individuals, who will determine the scope and high-level objectives for its work by mid-2016.
During the second stage, the Task Force’s work is likely to be expanded to include up to 30 individuals, focused on delivering specific recommendations for voluntary disclosures principles and leading practices, with a view to complete its work by end-2016.
Game-changer is an over-used cliché. But with backing like this from the world’s central banks, this is one!