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Industry Voices

Commentary: Companies must come clean on climate change risks

Several companies made recent promising moves when it comes to letting shareholders know the risks they face from a changing climate.

Last month in Paris, more than 200 firms agreed to transparently report the risks they face from events like rising seas or a rapid shift from fossil fuels. The week before the Paris summit, BlackRock (BLK) Inc. (BLK), the world's largest money manager, told all the firms it invests in that they should start disclosing climate change risks and, in a recent letter, doubled down on companies making positive social commitments. On the same day that BlackRock called for climate disclosure, Exxon Mobil Corp., long dogged by activists on the matter, said it, too, would report the risks it faces from a warming world.

These moves are encouraging, but they are not enough.

Far more firms need to make the type of pledges announced in Paris. And when they do, they need to commit to standardized metrics that can be easily compared across industries. Only then will investors have the tools they need to make smart financial decisions, rewarding the companies that cut waste and position themselves for a changing planet. And only then will corporate managers, pushed by the free market, have the incentive to truly minimize energy and material use — delivering not only less pollution but also more profits.

Systemic risk

Climate change is a systemic risk that could disrupt the global economy and usher in inefficient, large-scale government interventions. In contrast to the 2008 financial crisis, which arose abruptly, the climate crisis is playing out over decades. And its impacts are irreversible, severe and global.

Climate change is here and, as we saw this past summer, it's already hitting bottom lines. Hurricanes Harvey, Irma and Maria, made stronger and more devastating by climate change, destroyed tens of billions of dollars of property and infrastructure, and caused substantial loss of life. Wildfires, which are linked to climate change by warming temperatures and drier soils, decimated California's wine industry, an industry that generates more than $57 billion annually to the state.

We've also already seen examples of value-destruction in businesses that have ignored climate risks. Coal companies have gone bankrupt, as cheap renewable energy and natural gas displaces coal.

As CEOs know well, you can't manage what you don't measure. Companies should take full account of how climate change is likely to affect their business. As investors, we have a responsibility to prod them to do so by asking for this information regularly and using it to inform our decisions about how to allocate capital.

But, right now, we lack the tools to make the right decisions because companies are not being transparent.

Existing corporate sustainability reporting and disclosure efforts are obscure and provide information that is essentially useless to discerning investors. If every relevant business that could embrace climate change initiatives and report on sustainability progress actually did so, the result would be a reduction in climate-changing greenhouse emissions of about 10 billion tons by 2030, according to analysis from the NewClimate Institute. That's about half of the emissions reductions needed to prevent a dangerous temperature rise of 2 degrees Celsius.

This isn't just about avoiding losses. Studies published by Harvard University and the Henley Business School show companies that perform well on material sustainability issues and disclose climate risks outperform their competitors.

By reporting information such as total energy consumed, renewable energy utilized, or manufacturing waste recycled, management teams of industry rivals would strive to improve their metrics and outperform their competitors, thereby employing the power of the free market to drive down harmful greenhouse gas emissions.

This is not a problem that the government is likely to solve any time soon. So it's up to investors to apply pressure and get companies to voluntarily comply.

Organizations such as the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures have worked with industries to develop standards for disclosure that are material and decision-relevant for investors, without unnecessarily increasing the burden on companies.

There is an old expression in the securities markets — "disclosure cures." That's my hope with respect to sustainability disclosure and climate change.

Investors must lead on this effort. And they must do it now. After that, let the free market work on its own.

Jeff McDermott is the managing partner at Greentech Capital Advisors, New York. This article represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.