Lessons From the World’s Most Successful Climate Change Agreement
In a previous post, I addressed the complex universe of corporate and financial claims to climate change leadership, lifting the veil on marketing claims to distinguish the good (and maybe good), bad, and truly ugly. So, what can and is being done to make companies and investors more responsive to climate change concerns? As it turns out, quite a lot. Announcements of relevant actions are being announced almost weekly at all levels – by national governments, U.S. agencies, state governments, and initiatives by international institutions, consortia of banks and investors, universities, and non-profit organizations.
A draft executive order prepared by the Biden Administration titled “Climate-Related Financial Risk” is expected to call for a government-wide strategy to measure, mitigate and disclose climate risks facing federal agencies. On March 25th, New York State released proposed guidance for Domestic Insurers on Managing the Financial Risks from Climate Change. A few countries including France, the UK, and New Zealand have already announced such policies of their own that vary in scope, detail, and penalties.
This increasing focus on risk assessment and disclosure is an indication of the growing awareness that climate change is a near-term and serious threat to the economy – in addition to life on the planet. However, the reality is that at least for now and some time to come, corporate and financial claims of climate leadership are not easily evaluated. Some research and/or reliance on independent sources is required. Government-approved standards can provide some help, but many gray areas are likely to remain. Just as consumers are expected to read nutrition labels but make their own dietary choices, and cigarette packages carry strong warning language but still allow individuals to smoke, investors and shoppers will be given more information but remain the ultimate decision makers about the relative merits of claims to climate change leadership by companies and investment funds. The challenge will be to provide them with the readily understood information they need to enable informed choices.
Among the many recent efforts to respond to the challenge for more meaningful information on climate risks, some of the most impressive include the following:
1. Government agencies can pressure companies to provide Increased transparency in climate reporting. One example is action initiated by the Securities and Exchange Commission (SEC). As climate change issues can be considered increasingly “material,” or relevant to expected financial performance, the SEC is expected to require publicly traded companies to provide more detailed description of greenhouse gas emissions and their vulnerability to more frequent extreme weather events. On March 15, 2021, the Acting SEC chair Allison Harrison Lee announced plans to mandate greater disclosure of climate risks. She requested the staff consider a series of questions to help the Commission determine how best to “regulate, monitor, review, and guide climate change disclosures.” Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have also voiced their intention to consider measures, such as stress testing, to better prepare for climate risks to the financial system.
21 Percent: the average score of major insurance companies for the quality of the strategy disclosures in their climate reporting as evaluated by the consulting firm EY: “Most did not disclose the results of scenario analysis, including the financial impact or statements on the resilience of the insurer’s strategy.”
2. Numerous organizations are compiling numbers and rankings to evaluate climate-related actions of corporations and financial institutions. These organizations are attempting to address the problem through measures such as checklists for credible emission reduction targets and independent analyses and rankings such as those done by CDP (formerly the Corporate Disclosure Project) and the Asset Owners Disclosure Project. The existence of multiple sources with differing metrics is, however, likely to confuse the average investor. The World Bank is among those promising “alignment with the Paris Goals” (that warming be limited to 2°C above pre-industrial levels.) Meanwhile, Cambridge University advocates a temperature score which associates an asset – and in aggregate a fund – with a level of global warming measured in degrees centigrade (°C).
“While the concept [of carbon neutral concepts] is generally understood, there are multiple standards or certifications for carbon neutral commitments. This means each organization’s target can differ in a variety of ways, including emissions quantification methods, scopes covered by the commitment, and timelines for achieving the target.” 3Degrees.com
3. States are now promoting climate risk disclosure. Maryland now mandates the state pension fund assess and report on climate risks to financial performance, while California state pension funds broadly engage in climate change partnerships, advocacy, and engagement Contributors to these funds, as well as state residents more generally, are now able to assess whether climate risks are being adequately considered. A growing number of financial institutions are offering investors fossil free funds for more general savings. A website by the same name, fossilfreefunds.org, provides detailed information on the fossil fuel holdings of mutual funds and ETFs.
4. Some pension and mutual funds retain shares in companies responsible for GHG emissions in order to use their influence to demand both greater transparency and climate action. A paramount example is the investor organization Climate Action 100+,(see highlight below). The group supports climate-related shareholder resolutions and recently produced a benchmark that helps investors evaluate company ambition and action in tackling climate change. However, there is yet to be clear evidence of the effectiveness of shareholder climate initiatives.
5. Ongoing climate change-related legal challenges are increasing the risks for large greenhouse gas emitters and their shareholders. A lawsuit brought by the Attorney General of Massachusetts against the oil company ExxonMobil charges the company with misleading consumers and investors about its role in causing climate change. Several environmental groups recently filed a complaint with the Federal Trade Commission urging that the oil company Chevron’s claims of “ever-cleaner-energy” be investigated as deceptive advertising. (Some advertising agencies will no longer work for oil and gas companies, calling it a “moral decision.” ) The Harvard University endowment is yet another focus of legal challenge for its $838 million in fossil fuel-related investments. A long list of students, alumni, faculty, and elected officials filed a complaint with the Massachusetts Attorney General in March 2021 alleging that the investments violate duties imposed by state law.
Ultimately, an internationally agreed set of rules is necessary to allow comparing companies within industries and evaluating climate commitments relative to the Paris goals. What is good today may be average tomorrow. In the short term, consumers and investors will need to make distinctions among companies consistent with their values and financial strategy. While a growing number are choosing to be “fossil free” – and finding it can be quite profitable – others may for now endorse best-in-category companies like BP among oil and gas companies.
JP Morgan Chase: A Bad Past But a Good Future?
· $268 billion into coal, oil and gas firms over the last four years
· 2021 commitment to invest $1 trillion over next decade in initiatives to support climate action
In Part 1 of this post, I described how a few pioneering companies like Microsoft and financial entities like CalPERS are helping define what it means to show leadership on climate change. Such leadership needs to be celebrated and held up as a model for others, while promoting still better risk analysis and disclosure. The world’s business and financial communities will need to greatly step up their commitment to best practice if the Paris goals are to be met and dangerous climate change averted.
Alan S. Miller is co-author with Durwood Zaelke and Stephen O. Andersen of the forthcoming book Cut Super Climate Pollutants Now! He is a consultant on climate finance and policy who has worked on global environmental issues for more than 40 years, including 16 years in the World Bank Group.