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Investors controlling more than $9 trillion in assets today called on 36 major European firms to clean up their act on climate change—specifically when it comes to their accounts.
The group of 38 institutional investors signed a joint letter urging firms including oil giants Shell and BP, energy provider EDF, airplane manufacturer Airbus and car maker BMW, to account for climate risk in their financial statements, as nations move away from fossil fuels and ramp up efforts to decarbonize their economies.
The firms targeted were identified by the investors as being exposed to the many potential impacts of a wholesale transition away from fossil fuels.
The investors, part of the Institutional Investors Group on Climate Change (IIGCC), including J.P. Morgan Asset Management, Fidelity International and the U.K. Shareholders Association, expressed a concern that the real costs of the transition towards a “Paris aligned” future—limiting temperature increases to well below 2 degrees Celsius and ideally to 1.5 degrees Celsius—are not being reflected in the firms’ financial disclosures.
The investors included with the letter a paper on Paris-aligned accounting, which explained: “Accounts that leave out material impacts (whether in the reported numbers, or in disclosures such as sensitivities) will misinform and thus, result in misdirected capital.”
The paper set out why and how firms should go about disclosing climate risk, and further urged regulators to mandate Paris-aligned accounting and auditing. It then set out three courses of action investors would take when firms failed to meet expectations in their climate-adjusted accounting: engagement, voting and divestment.
“If the accounts leave out material climate risks, too much capital will go towards activities that put shareholder capital at risk,” the letter stated. “Worse still, this puts all our futures at risk.”
Explaining the aim behind the call to action, Stephanie Pfeifer, CEO of the IIGCC, said: “Companies can no longer afford to ignore what climate change means for their business. Investors need financial impacts of getting onto a net zero pathway to be booked and acted on.”
“Climate change is material and the importance of alignment with the Paris Agreement is beyond doubt,” Pfeifer continued. “What investors now need is visibility from companies in their accounts. They are making this clear today and expect companies to report in line with existing global accounting standards.”
There is broad acknowledgement among developed economies that investors could be the key to spurring climate action on the scale required by the Paris Agreement. Government stimulus plans to address the economic turmoil from the coronavirus pandemic are failing to take into account the climate crisis.
In the face of climate-denying leadership and governments apparently determined to pump Covid-19 stimulus cash into fossil fuels, it has in many cases been left to the private sector to demand institutional change.
Brunno Maradei, global head of responsible investment for Aegon Asset Management, one of the signatories to the letter, said: “Ensuring that the Paris Agreement is considered in financial statements is one way to ensure that the firms most exposed to carbon will be held truly accountable against this important global commitment, while also protecting long-term value for investors.”
Henrik Pontzen, head of ESG at signatory Union Investment, added: “Climate change is real. The costs of climate change are material. Financial accounts that do not reflect the costs of climate change are thus incomplete. In view of this we expect all companies to thoroughly examine their financial accounting practices.”
The move by the institutional investors aligns closely with research from Imperial College London that found investment in companies that don’t necessarily fit the “green” definition would be required if countries are to achieve a successful transition to lower-carbon economies.
In the report, released in September, researchers highlighted the “crucial role of transparent criteria in managing continued funding to fossil-fuel producers and energy-intensive firms.”
Noting that while there were not yet sufficient green assets in existence to take up the several trillion dollars of capital required for “deep decarbonization,” researchers Charles Donovan, Milica Fomicov and Anastasiya Ostrovnaya suggested that conventional, “high-carbon” industries could “meaningfully contribute to climate stabilization” if companies were required to adhere to a clear set of mandatory standards.
Links
- Institutional Investors Group on Climate Change (IIGCC)
- Leading investors call on Europe’s largest companies to address missing climate change costs in financial accounts
- Investor Expectations for Paris-aligned Accounts
- Institutional Investors Have More Power Than Governments To Shape Climate Future
- Fraction of money earmarked for COVID-19 recovery could boost climate efforts
- U.S. Withdraws From Paris Accord, Ceding Leadership To China.
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