Think Tank: Investors wake up to climate change realities

24 July 2014 11:22 Source:ICIS Chemical Business

Environmental change will play an increasingly important role in determining financial risk and return, cautioned Standard & Poor’s. The credit rating agency highlighted the fact that investors have become savvier about the potential risks of climate change on markets, operations and the cost of doing business.


Investors are giving more scrutiny to climate change risks.
Photo: © Rex Features

The investment community and regulators have woken up to the climate change threat, S&P said. More information is being demanded from firms about their exposure to climate-driven events and the prospective costs of carbon emissions.

The problem currently is that so many firms don’t appear to be willing or able to answer these investor questions.

“A wide array of businesses – not just insurers and carbon-intensive corporations – are being pressed to demonstrate how they are managing these long-term issues. Their future cost of capital will in part hinge on the answers they give,” S&P said. “Unfortunately, too many businesses still provide investors and other stakeholders with only a partial picture of the risks they face. And they offer an incomplete explanation of how they are mitigating these exposures.”

Investors are starting to demand more robust information about climate and carbon related risks. And while risks may seem obvious for certain businesses, such as those in oil, gas and chemicals, others are not. How will the cost of carbon, for instance, affect product chains and end-use markets? Might new markets develop for different products and services?

“Conventional financial analysis of carbon risk overlooks the ‘shadow liability’ caused by potential carbon price liabilities from indirect exposure across the value chain,” S&P said.

It noted that the US Securities and Exchange Commission (SEC) has rules that require firms to communicate climate risks and that the European Parliament has approved something similar. There is not, however, a “comprehensive and coordinated disclosure regime”.

Such a regime will develop but in the meantime investors are doing their own analysis. ExxonMobil is the first oil and gas major to publish details of its climate risk exposure from stranded assets, S&P noted. “But most business have yet to accept that climate and carbon risks are ever more material to corporate performance and value.”

In reality the carbon debate has only just been joined. Some countries and regions have legislated against carbon. Others have sought to do so but stepped back, possibly only for now.

By Nigel Davis