Climate risks: Disclose now – or pay later

Climate Risk

For some people, creating a more perfect world will involve giving up meat or switching to an electric car. For big organizations, sustainability starts with a more daunting challenge: signing on to a maze of new paperwork and regulations. But 2019 may go down as the year that the pressure to comply hit critical mass.

Exhibit A: The London-based Principles for Responsible Investment (PRI) has just announced that, as of next year, it will require its 2,250 signatories to formally report how they have considered specific climate-change risks in their investment portfolios. These signatories represent global institutional investors with US$83 trillion in assets.

The PRI justifies its bureaucratic “scope creep” by noting that “climate-related risks and opportunities are set to grow in the coming years. The impacts of 1.5 C of warming are now better understood, with [recent] reports stating that the world is on track to miss a manageable level of warming by a wide margin.”

The new rules will require participating organizations (primarily pension funds, foundations and other investment managers) to divulge three types of data:

  • how climate issues impact their investment strategies and/or products
  • the key internal roles that include responsibility for climate issues, and whether their strategic planning includes analysing the investment impacts of future climate-related risks and opportunities, including how these strategies have changed over time.

While required to report all these details, the signatories will be able to keep the data confidential
if they choose.

The PRI was established in 2005 to administer the six principles of responsible investing developed by the United Nations. The organization added additional climate-related disclosure sections to its reporting guidelines for 2018. After 480 investors voluntarily completed those sections, the PRI opted to make further disclosure mandatory.

In February, The Economist – the global bible of business – threw its weight behind even further regulation. In an editorial entitled “Hot, Unbothered,” the newspaper warned that extreme weather events, from floods to forest fires, threaten the asset values of companies all over the world – and the risk is rising as governments fail to impose meaningful environmental regulations.

The newspaper noted that some companies do the right thing by analysing and disclosing their environmental risks, but “markets tend to punish honesty about previously unacknowledged risks, not reward it.” Yet postponing the truth rarely turns out well.

Consider PG&E, the Californian utility that was forced into bankruptcy protection in January following indications of its possible liability in sparking wildfires.

“Such cases would be rarer if companies were legally obliged to assess and disclose their climate vulnerabilities,” The Economist concluded. “It is in businesses’ long-term interest to own up to the threats they face.”

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