by Howard Covington, John Rogers, Rich Pancost
Extreme times call for extreme measures. The millions of women who marched on inaugural day-plus-one understood this; the lawyers who sat on airport floors with laptops to fight the immigration ban understood this; the people behind the AltUSNatParkService Twitter account likewise are up for the fight.
What about investors? Now that Trump has declared climate change a nonissue—now that he is doubling down on fossil fuels as the rest of the world decarbonizes—are investors on board? At Preventable Surprises we believe that climate risk threatens portfolios just as it threatens the planet. To respect their fiduciary duty to their beneficiaries, institutional investors must use the tools at their disposal to accelerate a transition to a low-carbon, sustainable economy.
The Task Force on Climate-Related Financial Disclosure has recommended that companies disclose the risks to their businesses if average global warming surpasses 2°C. In theory, investors can then make more informed decisions when managing climate risk. While TCFD has moved the ball down the pitch, it fell short of the goal. We have requested that TCFD, in its final report, goes beyond scenario analysis to require transition planning to a low-carbon future. Investors should demand the same, both with TCFD and at the companies in which they invest.
“(Transition planning) shifts the company’s disclosure from one that is passive and hypothetical to one that is active and real world,” the Preventable Surprise response to TCFD states. “Investors can then monitor what is done against this plan not only as a recipient of the risks and opportunities relating to climate change, but also as a contributor to those risks and opportunities.”
Business as usual is likely leading us toward more than 3.5° Celsius of global warming above pre-industrial temperatures by 2100. An ice-free Arctic in the summer may provide a shorter route for shipping firms but it will come with complex and unpredictable changes to Northern hemisphere weather patterns, affecting everything from farming and fisheries to the costs of air travel. Extreme flooding, heat waves, droughts and food shortages will exacerbate instability in the world’s poorest regions. Climate refugees will dwarf the one million Syrian refugees who have already posed challenges to European societies. Some economists estimate as many as 100 million will flee lands made inhospitable due to climate change. The risks from >3°C are great enough that the financial system should be actively avoiding this outcome, not just ‘thinking about’ it
In addition to putting forward a bigger ask (transition plans rather than scenarios), here are four suggestions for how the TCFD report could kickstart significant change:
1. Pay for performance: Remuneration incentives need to be aligned with interim transition goals. If not reoriented, financial incentives will actively block change.
2. Be assertive: TCFD should listen to its members who said that guidance should be mandatory, not voluntary (e.g. Aviva). As Blackrock has said, many investors want a universal standard and do not want to address companies case by case. In the UK, this could be done simply by adopting ClientEarth’s suggestion that the FCA rule book references the TCFD recommendations in relation to the obligation to report material risks, including climate risk. In the USA, the SEC could be lobbied to implement its climate guidance, which at present looks likely to be shelved.[1]
3. Pension power: Asset owners should assume their role as key movers, as rightly identified by TCFD. Pension funds have a particular responsibility because of the longevity of their obligations, and are potentially vulnerable to lawsuits based on intergenerational equity. They should follow the example of the Danes, for example: Danish insurer PFA avoids "investing in the companies working against the goals and accord of the Paris agreement of COP21". Pension funds can amplify their impact by pushing change down through their investment supply chain, as routinely happens in the corporate sector.
4. Proxy fight: Investment management companies from which TCFD members are drawn—Blackrock, JP Morgan Chase AM and UBS AM—collectively control assets equivalent to the GDPs of Japan, Australia and Switzerland combined. They vote proxies on behalf of millions of investors. If they vote against AGM resolutions supporting 2C transition plans and 2C disclosure, they will undermine both their credibility and that of the task force.
John Rogers and Rich Pancost are board members of, and Howard Covington is a special advisor to, Preventable Surprises. Covington is also vice chair of ClientEarth. Rogers is also a board member at SWM International and OM Asset Management. Pancost is director of the Cabot Institute, which conducts world-leading research on the challenges arising from how we live with, depend on and affect our planet.