Risky business: G20 panel to order climate stress tests

Donald Trump’s US election win may damage the Paris climate deal, but climate risk reporting rules for businesses could radically change the investment landscape

(Pic: Bank of England/Flickr)

By

Does you have a plan if the world moves rapidly away from oil, gas and coal? How will you be affected by increased extreme weather? What’s your exposure?

CEOs of major corporations may not have the answers to these questions now, but by 2017 they will be expected to do so under radical – if voluntary – plans to be announced on Wednesday.

That’s when a G20-mandated panel of experts chaired by Bank of England governor Mark Carney will publish guidelines on how it wants business to tackle climate risk.

It may have a dull name, but the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure could deliver one of the strongest signals yet to business that climate change matters.

“We think companies will pay more attention to this,” an analyst with a major consulting group told Climate Home on Monday, alluding to previous demands for risk disclosure from green groups.

One member of the 31-strong panel confirmed to Climate Home that companies would be asked to use the 2C warming limit outlined in the Paris climate deal as a benchmark.

Weekly briefing: Sign up for your essential climate politics update

Two other panellists – Mike Wilkins from ratings giant S&P and Jon Williams from consultancy PwC – told Bloomberg that development of long term scenarios around 2C would be a recommendation.

That means they’ll need to explain how targeted greenhouse gas cuts will impact their bottom line: a painful reality check for many companies with large oil, gas and coal investments.

Exxon Mobil is already fighting claims from New York’s attorney general it misled investors over the company’s future profits in a carbon-cutting world.

Coal giant Peabody faced a similar suit in 2015, and perhaps for good reason. While these companies make bullish projections, major banks seem less sure of their prospects.

A 2015 report from Barclays said the fossil fuel sector could lose US$34 trillion in revenues by 2040 if countries implement the Paris climate deal, with oil companies accounting for $22.4trn of that total.

Earlier this year, leading fund manager Blackrock issued an equally bleak projection for coal’s future, warning “investors can no longer ignore climate change”.

While the FSB study is firmly under wraps till Wednesday, it’s possible to glean an outline of its key aspects from what task force members have said recently.

Steve Waygood, chief responsible investment officer at Aviva Investors, wants a sector-by-sector approach where physical, liability and transition risk for investors, lenders and insurers are disclosed.

In a report launched at last month’s COP22 UN climate summit, Waygood and Stephanie Maier, Aviva’s head of strategy and research, argue investors urgently need more information.

“We believe asset owners should ask for information on how their asset managers integrate climate risk into their investment process across all asset classes, including security selection, portfolio construction, and portfolio risk management,” they say.

“The world’s institutional investment community has a financial interest, as well as a fiduciary and moral duty to future generations to promote a rapid yet well managed transition to a net zero climate economy.”

Report: Fund managers who ignore climate risk breaching ‘fiduciary duty’

What’s important is that businesses can demonstrate they understand the challenges posed in a world with tougher climate policies and hotter temperatures, says Stephanie Pfeifer.

CEO of the Institutional Investor’s Group on Climate Change, Pfeifer represents 130 companies accounting for $14 trillion and has long championed more rigorous disclosure rules.

“Failing to address climate change presents huge systemic risks to the global economy and financial stability,” she told Climate Home.

“That is why European investors have keenly supported the work of the Task Force on Climate Disclosures and will welcome – and scrutinise – its proposed four-fold framework for standardised forward-looking quantitative and qualitative corporate climate disclosures related to governance, strategy, risk management and targets.”

Risks Pfeifer wants companies to reveal every year as part of their annual accounts include the dangers their supply chains face from extreme weather.

For instance, this year’s sustained drought in Pakistan and parts of India sent cotton prices to a decade high, forcing the countries to import supplies and raising costs for clothing suppliers.

While coming clean doesn’t guarantee businesses will cut their carbon footprint, having these costs detailed on the annual accounts will force boards to “pay more attention” to climate risk, says Paul Simpson, CEO of CDP, an organisation that promotes climate disclosure.

“My view is that many companies do it voluntarily, but that the FSB will catalyse this and assist more to do this,” he said.

“If you’re an investor you want to know the risks and opportunities in a portfolio – people are trying to work out how this will change in the future – and the Paris climate deal is a plausible scenario.”

The impacts of the FSB report will take time to filter through the market: for one thing, there’s a 60-day consultation period ahead of the 2017 G20 meeting where it is to be formally signed off.

There’s also the matter of US president-elect Donald Trump and his dislike for rules that might be perceived as placing an added regulatory burden on business.

But the signs are Germany has made this initiative and climate change more broadly a priority for the July meeting in Hamburg, raising the political stakes further.

And business seems onside. Julian Poulter, CEO of the Asset Owners Disclosure Project – another group focused on climate risk – believes the FSB report will be generally welcomed.

“There comes a point where you realise the writing is on wall… if there is a sense of inevitability that the train is leaving then people will come on board,” he said.

“And the great thing about financial risk is that it’s apolitical in theory… it would have been a great way to look at this issue in the US.”

Read more on: Climate Finance | Green bonds