Investors, Now We Have Your Attention On Climate Change

Fairfax - Julien Vincent*

A clarion call from within the industry, and a costly taste of climate reality, saw investors finally wake up to global warming in 2017.
Investors have tended to downplay their role in combating climate change, preferring to cast themselves as helpless bystanders against a lack of stable and clear policy.

The costs of climate change impacts, and the transformation to a low-carbon economy, present an array of financial risks for investors. Photo: Jessica Shapiro JLS

In Australia, you can see why this argument is effective.
Last year, our climate and energy debate has included the Treasurer Scott Morrison gleefully waving a lump of coal around in parliament as Australia suffers a record-breaking heatwave, the Resources Minister Matt Canavan championing the idea of using public money to build a new coal power station, and renewable energy incentives cut against the advice of our Chief Scientist.

Already over 1ºC of warming, the rate of temperature increase is accelerating, making the challenge of outpacing the threat with remedial action even greater.

But the reality is this argument from investors is bogus, regardless of how stable or chaotic the policy context is.

Aside from the principle that the owners of the economy should shoulder some responsibility for its outcomes, a far more compelling argument to investors took hold in 2017: climate risk.
The costs of climate change impacts, and the transformation to a low-carbon economy present an array of financial risks that manifest in the portfolios of investors.
This was the case put by the Financial Stability Board, which set up a Task Force on Climate-related Financial Disclosures (TCFD) to guide investors on how to assess climate risk.
Its final recommendations were released in June and by December the TCFD had the support of over 150 financial firms, responsible for assets of over $US81.7 trillion.
The increased expectation was also starting to get results from companies.
After several failed attempts, investors successfully passed a resolution calling on Exxon Mobil to disclose the risks to its business if the world succeeds in holding global warming below 2ºC.
Australian companies were also starting to move.
By the end of 2017, seven companies had produced scenario analyses of how they stack up in a low carbon economy, with another 12 committed to implement the TCFD recommendations in some form.
Increasing awareness of climate risk also made for a stronger argument that investors divest or withhold finance from companies and projects that have no place in a low-carbon economy.
Banks that had already excluded lending to coal mines and power stations also ruled out extreme oil projects such as tar sands.
NAB and Westpac formally restricted lending to coal, while Commonwealth Bank and ANZ signalled their exposure to coal would continue to fall over time.
The World Bank, which had already excluded coal lending, would do the same for upstream oil and gas from 2019.
AXA made one of the last and the largest divestment announcements of 2017 as the global insurer sold €3.1 billion worth of coal and tar sands stocks.
Financial institutions also received a taste of what physical climate change risk looks like.
Hurricanes Harvey, Irma and Maria, which battered the Caribbean and US Gulf Coast last year, resulted in over a dozen insurance companies recording massive losses.
European insurer Hannover Re took the dramatic step of selling its entire stock portfolio, worth almost €1 billion, to cover the cost of natural hazard claims, while questions were being asked whether the insurance industry could even survive climate change.
If 2017 was the year when investors woke up to the significance of climate risk, 2018 needs to be when finance and investment shifts en masse away from activities that threaten a safe climate future.
We are seriously running out of time if we want to keep a lid on global warming and avoid the worst climate change impacts. 2017 is already expected to join 2015 and 2016 as the three hottest years on record.
Already over 1ºC of warming, the rate of temperature increase is accelerating, making the challenge of outpacing the threat with remedial action even greater.
Seven Australian companies producing scenario analyses of how they perform in a low-carbon economy is a start, and nothing more.
There are dozens of other companies in the ASX200 that are still not bothering, or openly dismissing the idea of managing climate risk.
Investors might feel good by targeting 100+ companies to lead on climate risk disclosure, but when there are over 770 companies just in the global coal supply chain, this is far too narrow a focus.
And with no room left in the carbon budget to expand the fossil fuel industry, policies of financial institutions need to reflect climate reality, even if that means leaving governments behind.
Whether for moral reasons or sheer self-interest, investors have every reason to kick climate risk out of the economy as quickly as possible.

*Julien Vincent is the executive director of Market Forces.

Links

• Task  Force  On  Climate Related Financial Disclosures (TCFD) 
• New research: How have ASX50 companies responded to the TCFD recommendations?
• Financial firms lead shareholder rebellion against ExxonMobil climate change policies
• Big Insurers Brace for Perilous Future as Climate Risks Escalate
• FACTBOX-Insurers and reinsurers count the costs of recent hurricanes, quakes