Climate change, like covid-19, is not a black swan event. Just as governments foresaw the impact of a pandemic but failed to make adequate preparations, we can see the likely consequences of climate change depending on how much – or how little – we all choose to do about it.
We started work on our latest deep dive – on what the 20 biggest managers and investors are doing to mitigate the worst effects of global warming – well before the coronavirus swept the globe. Our idea was to delve into the climate conversation, from an infrastructure perspective, as openly and as transparently as we could. To that effect, we put together a list of seven questions (16 if you count sub-questions) which we sent to the above organisations, industry leaders with more than $450 billion of assets under management.
What we found was decidedly mixed.
We only managed to engage with 11 organisations – the remaining nine either declined to comment or could not be reached after repeated attempts – and their answers varied in breadth and quality. That highlighted how hard it is, across industries, to get adequate disclosure on climate change – what S&P Global Ratings’ Michael Wilkins called one of the “last holdouts” in financial markets.
On the one hand, this is not entirely surprising. As Meridiam’s Thierry Déau and ENEA Consulting’s Vincent Kientz put it in a just-published article on how to integrate impact into infrastructure investing: “After having designed a very sophisticated accounting and financial system, we now need to develop a robust accounting system for environmental and social aspects for unlisted assets.”
The stumbling blocks for firms to efficiently report on what they are doing about climate change are real – and we don’t underestimate their impact. But that doesn’t tell the whole story. Because even where good frameworks do exist, it’s often still hard to get clarity on how firms are using them.
The recommendations from the Task Force on Climate-related Financial Disclosures, generally seen as “a good starting point”, are a case in point. While TCFD has now garnered support from more than 1,000 organisations, chairman Michael Bloomberg wrote last June that “today’s disclosures remain far from the scale the markets need to channel investment to sustainable and resilient solutions, opportunities, and business models”.
Of the managers and investors we surveyed, only four refer to TCFD: BlackRock, which is a founding member; Brookfield, which says it initiated a process last year to “align its efforts with TCFD”; CDPQ, which “encourages” its portfolio companies to disclose in line with the recommendations; and OMERS, which has “endorsed” the TCFD recommendations.
The differences in language are not insignificant especially since, according to the TCFD, support does not mean immediate implementation. Also, as Mark Fulton, founder of Energy Transition Advisors, pointed out: “TCFD is disclosure – you’ve disclosed your risk and that’s good, it’s important – [but] it doesn’t mean you’ve done anything”.
If getting clear answers from firms is this hard, it’s not unreasonable to question, or even lower expectations, about what they are actually doing about climate change, then. The reality, as Fulton also highlighted, is that a forceful policy response to climate change within the near term is not priced into today’s markets.
“Yet, it is inevitable that governments will be forced to act more decisively than they have so far, leaving investor portfolios exposed to significant risks. The longer the delay, the more disorderly, disruptive and abrupt the policy will be,” he added.
The risks of inaction – or even just being slow on the uptake – stand to be material. Failing to adequately prepare, then, will be a costly option.
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