2 Questions Every Investor Should Ask About Climate Risk

PARIS—It's not just fossil fuel companies that will find themselves with stranded assets in a low-carbon economy, but any company that depends on carbon-intensive products or processes that are about to get more expensive. Investors can ask companies two simple questions to assess how ready they are to transition to the low-carbon economy.
Investors have a benchmark to evaluate the climate risk of companies in the commitment each country made in Paris, called an Intended Nationally Determined Contribution or INDC, said Mark Carney, governor of the Bank of England and the chair of the international Financial Stability Board.
"It is a reasonable question to ask a company, What is your strategy to reduce your footprint consistent with the INDC that the relevant jurisdiction assigned?" Carney said. "That’s a basic question. Are you matching it, are you outperforming?"
For example, the European Union committed to reducing carbon emissions 2.8 percent per year by 2030, according to the World Resources Institute, which gleaned annual reduction rates from the INDCs of Europe, the United States (also 2.8), Canada (1.7) and Japan (2.3).
Whether companies are reducing their carbon footprints at those rates is "one way to think of framing what's going on here and the corporate response, and what's a well managed company and what isn't," Carney said.
But there's a second way, a second question investors can ask:
In the Paris Agreement, countries commit to achieving "a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century."
That goal "will require net carbon dioxide emissions to be reduced, in effect, to zero," said Myles Allen, a geosystems scientist at Oxford University.
So Carney contends it's reasonable to ask companies what plans they have to attain that goal.
"What’s your strategy for net zero?" he said. "Ultimately whatever degrees of centigrade the climate settles at, you’ve got to get to net zero to get the climate to stabilize. So what’s your strategy to get to net zero?"
It's perfectly valid for a company to respond that it has no strategy, Carney said, and likewise valid for investors to take that response into account.
"They could disclose that they don’t have a strategy to address it. That’s a choice that a company and its shareholders could make. It may have consequences for their cost of capital, but that’s a market decision."
Carney is not the only one posing these questions.
Sharan Burrows of the International Trade Union Confederation suggested investors ask to see a company's plan: "What’s your plan for decarbonization and jobs? What’s your time frame? And we will stay the distance with you only if you in fact are serious about it and you can show us results here."
Pension funds control $28 trillion in investments, and pension fund managers were among an unprecedented number of institutional investors who attended the Paris Climate Conference, giving businesspeople and financiers occupied a higher profile than they have had at past conferences.
"Investors are taking action," said Fiona Reynolds, CEO of Principles for Responsible Investment, who headed a panel of institutional investors in Paris. "They’re more actively monitoring their carbon risk, they are measuring their carbon footprint to understand their exposure, they’re setting decarbonization strategies, they’re obviously concerned about stranded assets—what risk that has to their investments—and they’re assessing those risks and looking at their exposure."
Individual investors may have more difficulty accessing information, as Moody's noted in a report on the outcome of COP21:
"Ideally, an entity's specific disclosure would be done in a globally consistent manner and in a way that is independently verified," said Henry Shilling, a Moody's senior vice president, in the wake of COP 21.
That's why Carney's Financial Stability Board enlisted Michael Bloomberg to head a new task force on climate disclosure.
By COP22, scheduled for November in Marakesh, said Carney, investors "will have real information about the corporate response."
Read more about investor actions on climate risk.

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