The Big Disconnect

There is little doubt that the most direct way to get private sector companies to change behavior to lessen climate impacts is through strong and binding legal/regulatory requirements. This has been the main focus of many climate activists and their policy maker allies for decades – and by and large, the wait continues. But short of legal requirements, perhaps the most effective influences on corporate governance and behavior are the demands and expectations of the capital markets – as VantagePoint Managing Director Steve Dolezalek put it recently: “[U]ntil you convince the financial markets of something, you’re not going to change behaviors at a meaningful scale.” Over the past decade, many corporate leaders, academics, commentators – and even the SEC (to a point) – have preached that climate change is a central business issue that impacts company value. The main focus of these discussions has been around two types of climate risk. First, a changing climate characterized by more extreme weather threatens property values, access to key natural inputs like water, and the resiliency of supply chains. Second, governmental responses to climate change are proliferating and new regulatory structures can limit markets for some products (like inefficient appliances or high global warming potential refrigerants), increase energy costs, force changes to industrial processes, or otherwise force changes to business as usual practices. Unilever CEO Paul Polman has stated that climate change costs his company more than 200 million Euros a year. Many leading companies, including Unilever, Walmart, Dow, NRG Energy, Dupont and others have made significant investments and changes to business practices in order to limit their exposure to climate risks – and to seek competitive advantage by making such changes.

But here’s The Big Disconnect – mainstream financial markets do not seem to care. For better or for worse (and usually it’s for the worse) management is forced to be responsive to the questions and demands of analysts and investors on a quarterly basis. Management compensation is often tied to share price and analysts and investors are not translating mitigated climate risk or proactive “climate competitiveness” investments into equity value. Earnings calls rarely elicit questions about climate risk broadly, or even more specifically about energy productivity, fossil fuel reliance, or extreme weather vulnerability. If a company like Unilever faced a 200 million Euro annual liability for anything other than something called “climate change”, could one imagine an analyst not asking about it? Of course there are activist investors (an increasing number) who do care and who do ask and who do make investment decisions with climate considerations in mind. These groups, like CERES Investor Network on Climate Risk (INCR), represent sizable and increasingly important voices in the investor community — but they remain a distinct minority. The mainstream sell-side analysts and financial markets are the dogs that didn’t bark.

Why the Big Disconnect? There are many theories and potential explanations (not among them is that climate is not financially relevant). It could be that analysts and investors are fully aware of climate risks and opportunities, but given liquidity and short- termism they don’t care; they will sell when the climate chickens start to come home to roost. Maybe. But I think we are giving the mainstream mind too much credit. Short-termism is very real, but it doesn’t, for example, prevent analysts and investors from approving of a company’s R&D expenditure plan if they think it will yield competitive value in the future. Or, it could be that mainstream market players just don’t have the information they need. This is likely closer to the truth and its why there has been increasing focus among activists and activist investors to get companies to disclose more information about greenhouse gas emissions and climate risks. This in part the theory behind the very successful Carbon Disclosure Project (CDP) which has signed up a sizable portion of the Fortune 500 to report GHG emissions and other climate and sustainability related data.

But the Big Disconnect remains; demand is not keeping up with supply. The answer does not lie in convincing the mainstream markets that climate change is the world’s preeminent threat. We shouldn’t care whether they care. The answer may lie in presenting what is considered essentially “non-financial” data in a form and in a language that is familiar to mainstream investors. We want them to consume financially-relevant data as they typically do; we just want them to see climate related risk and opportunity as just another data point that helps them do their job better. When unenlightened self-interest becomes a tool in the climate debate, we will have made progress.


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