Zero Carbon Finance: helping companies provide the climate change information investors want
Updated: Jan 21
Investing is changing. The interests of companies, shareholders and broader society are converging as environmental, social and governance (ESG) factors move into the mainstream with climate change the key catalyst.
No longer is maximising returns for shareholders the sole goal. Instead, the Financial Reporting Council (FRC)’s new UK Stewardship Code 2020 directs asset managers and other institutional investors to “create long-term value for clients and beneficiaries” whilst achieving “sustainable benefits for the economy, the environment and society”. The code specifically notes that the environment, “particularly climate change”, has become a material issue for investors to consider.
This should hardly come as a surprise. Climate change – or global warming - has become the defining issue of our time. Its impacts on the world economy, on corporate profits and on financial markets are likely to be so far-reaching that it will come to dominate almost every investment decision. The issue has leapt up the political agenda amid heightened public anxiety and dire warnings from the Governor of the Bank of England that “firms ignoring the climate crisis will go bankrupt”.
And these impacts are likely to be felt much more quickly than most people currently assume. As the often-quoted aphorism, coined by economist Rudi Dornbusch (1942-2002) says: “In economics things take longer to happen than you think they will and then they happen faster than you thought they could.”
This idea is echoed by energy expert Michael Liebreich who has likened the energy transition to “waiting for a sneeze”. It takes longer to arrive than you expect but once it does “it is going to be explosive…… [and] that is when the restructurings and bankruptcies happen.”
The problem for investors is that companies in the real economy are still not providing information that is “detailed or uniform enough to help investors make all finance green finance”. That is according to Mirza Baig, Global head of governance at Aviva Investors, quoted in an article in Edie yesterday: “Better corporate disclosure needed to help sustainable finance go mainstream”. As the piece points out, “despite a 50% year-on-year increase in pledges to disclose, the level of information provided is broadly not of “decision-useful” quality.”
Writing on a similar theme in the FT, also yesterday, John Plender cites the fear of big investors that “companies in energy-intensive industries are failing to recognise the potential hit to asset values posed by climate risk.” However, he sees signs that pressure from auditors on companies to provide better quality information could improve matters. He notes the new guidance from the International Accounting Standards Board which explains the “potentially very material” climate risks for valuations of assets and liabilities, and “therefore for future corporate profits and liabilities”.
The key to providing the better quality and decision-useful information investors seek is for companies to implement the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). As I may have written previously, the TCFD recommendations, published in 2017 following a mandate from the G20’s Financial Stability Board, provide a framework for companies to carry out a holistic assessment of the risks and opportunities they face from climate change and then disclose these under eleven headings to their investors.
Helping companies implement the TCFD recommendations is our main focus here at Zero Carbon Finance.