Global warming is rising to new and dangerous levels, so says the U.S. Government's own National Climate Assessment report, published ahead of the international policy gathering at COP 23 in Bonn, held from Nov. 6-17. Investors are also feeling the heat.
The U.S. scientists' conclusions make for somber reading by the government officials gathered to consider how to mitigate the worst effects of climate change. Extreme weather events, such as hurricanes, drought and sea level rise, pose daunting social and economic challenges. The policymakers are not the only ones pondering what is to be done. Investors are now calling for risk reporting, in line with recommendations from the Financial Stability Board.
The U.S. report contains the seeds of a solution. It concludes that human activity is the main cause of global warming. This in turn means that human activity can be adapted.
For those companies contributing to global warming, the challenge is to bring their greenhouse gas emissions into line with the science.
This is where investors have a vital role to play. Through their equity holdings, investors are the owners of companies. Their financial interest in getting this right is reflected in growing concern in the insurance sector and growing appreciation in debt finance that climate change poses risk.
CalPERS carried out its Montreal Pledge to identify sources of carbon emissions in our public equity portfolio of 11,000 companies. A fraction of these — fewer than 100 — were responsible for more than 50% of the carbon emissions we identified. That poses opportunity for investors, to compare their portfolios, to identify common holdings, and thence to request and require that companies make the necessary change.
There is now good advice on how companies need to respond. The Financial Stability Board is the international body tasked with strengthening and preserving stability of financial markets. Climate change is one such systemic risk to stability, causing the group to convene a task force on the subject — The Task Force on Climate-Related Financial Disclosures (TCFD). The task force's recommendations, present the consensus views of global investors, lenders and insurance underwriters on the climate risk and opportunity information they need to make informed decisions.
Current reporting is sparse and inconsistent and that inhibits market recognition of risk and opportunity.
In supporting TCFD, investors will call on companies to begin reporting their climate change risks and opportunities, and particularly the impact of moving to limit the emissions that are causing climate change.
Investors, to the tune of $22 trillion, were out in force to support the Paris Agreement. They were present at COP 23 in Bonn and will be at the upcoming climate finance summits in Paris, New York and San Francisco. The U.S. sustainability non-profit organization Ceres was in Bonn with members of the Ceres Investor Network on Climate Risk and Sustainability, of which we are a member. We are also members of other global and regional networks that are joining forces to meet the challenge in Asia, Australia and Europe.
For all the sound and fury of climate change debate, U.S. scientists conclude that "It is extremely likely that human activities, especially emissions of greenhouse gases, are the dominant cause of the observed warming since the mid-20th century. For the warming over the last century, there is no convincing alternative explanation supported by the extent of observational evidence." The phrase "extremely likely" in scientific parlance means "95 - 100%."
Science plus economics is a powerful combination. Investors are increasingly persuaded that they have a right and a responsibility to tackle climate change.
Institutional investors also have the benefit of a long-term investment horizon. For us, it's the best part of a century. As a material risk to our ability to meet liabilities and opportunity to improve returns, we consider it part of our fiduciary duty to consider climate change as part of our decisions.
Facing the long-reach of the global financial crisis and retirement of a large segment of the work force, U.S. pension funds are under greater pressure to explore opportunities for better risk management and portfolio optimization. Climate change presents a risk affecting greater than 98% of market cap and low-carbon opportunity in the range of $1 trillion per year in infrastructure investment to mitigate the worst climate change impacts.
Anne Simpson is investment director of sustainability and Divya Mankikar is the investment manager of sustainability at California Public Employees' Retirement System, Sacramento. This content represents the views of the author. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.
