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.