How to make a profit from defeating climate change
The challenge is that investors currently don’t have the information they need to respond to these developments. This must change if financial markets are going to do what they do best: allocate capital to manage risks and seize new opportunities. Without the necessary information, market adjustments to climate change will be incomplete, late and potentially destabilising.
Public policy, consumer demand and technological innovation are driving a shift towards a low-carbon economy. Which companies and industries are most, and least, dependent on fossil fuels? And who stands ready to provide resilient and sustainable infrastructure? Which financial institutions are best positioned to gain and which to lose? In every case, which firms have the governance, resources and the strategy to manage, and profit from, these major shifts?
We believe that financial disclosure is essential to a market-based solution to climate change. A properly functioning market will price in the risks associated with climate change and reward firms that mitigate them. As its impact becomes more commonplace and public policy responses more active, climate change has become a material risk that isn’t properly disclosed.
In response to a G20 request to consider the financial stability risks, the Financial Stability Board created a taskforce on climate-related financial disclosures. Its purpose is to develop voluntary, consistent disclosures to help investors, lenders and insurance underwriters manage material climate risks. As befits a solution by the market for the market, the taskforce is led by members of the private sector from across the G20, including major companies, large investors, global banks and insurers.
After a year of intensive work and widespread consultation its recommendations are now publicly available. They concentrate on the practical, material disclosures most relevant to investors and creditors and which can be compiled by all companies that raise capital as well as financial institutions.
We are pleased that all taskforce members, companies with market capitalisation of $1.5tn and financial institutions responsible for assets of $20tn, have announced their support for the disclosure recommendations. We encourage others to participate in the consultation, to become early adopters thereafter, and to encourage the companies in which they invest to also make the disclosures.
A year ago in Paris, 195 countries committed to limit the rise in global average temperatures to less than 2C. With better disclosure, a market in the transition to that world can be built. That market will expose the likely future cost of doing business, of paying for emissions, and of changing processes to avoid both those charges and tighter regulation. And it will help smooth price adjustments as opinions change, rather than concentrating them in a short, dangerous space of time.
Of course, given the uncertainties around climate, not everyone will agree on the timing or scale of adjustments required to achieve this goal. But the right information will allow optimists and pessimists, sceptics and evangelists, to back their convictions with their capital.
Early disclosure rules allowed 20th-century financial markets to grow our economies by pricing risks more accurately. The spread of such standards internationally has helped lift more than a billion people out of poverty. Climate-related disclosures could be as transformative for 21st-century markets.