My big idea and prediction for 2018 is that mainstream investors and corporate C-suites across the globe will reach consensus that climate change is a material financial risk. As a result, the need for better climate-related financial disclosure will be a dominant theme in communications between investors and corporate management in the coming year.
In 2017 shareholders defeated ExxonMobil management in an epic rebellion over climate change disclosure.
In the world of corporate finance and law, information is “material” (and must be disclosed) if there is a substantial likelihood that a ‘reasonable investor’ would attach importance to it in determining whether to buy or sell a company’s stocks or bonds. There is no bright line rule for what is material, and corporate managers and attorneys have long had ample room to argue that climate change is immaterial because its financial impacts are too uncertain or too remote in time to significantly affect current stock prices.
In 2017 this rationale began to crumble. In 2018 it will collapse entirely. Here are seven of the main reasons why.
1) “It was a view of hell.” This is how one Californian described the Thomas fire in Southern California. California Governor Jerry Brown attributed the wildfires that ravaged the greater Los Angeles area in 2017 to climate change, saying such events are part of a “new normal” residents can expect due to man-made global warming. Following Hurricane Sandy, former New York City Michael Bloomberg concluded that cities must lead the charge against climate change. Brown is widely expected to run for U.S. President in 2020. Bloomberg, a billionaire businessman and possible future presidential candidate, now chairs the Financial Stability Board (FSB) Task Force on Climate-Related Financial Disclosure (TCFD) (more below). Extreme weather events like hurricanes Harvey, Irma, and Maria and the California wildfires are changing the public zeitgeist and increasing the resolve of government and business leaders to fight climate change.
2) Correlation doesn’t prove causation, but… While it remains a challenge to attribute any one extreme weather event to climate change, scientists are getting closer. A first-of-its-kind study published in Nature last year launched the new field of “attribution science,” which uses observations and models to identify the factors that lead to extreme droughts, heat waves, wildfires, floods and hurricanes. Though they couldn’t prove that global warming had caused a deadly 2003 heat wave in Europe, British scientists showed that warming from human carbon emissions had doubled the risk of occurrence. The attribution of weather-related catastrophes to human carbon emissions will expand the legal and fiduciary duties of those responsible for keeping people and their retirement savings safe.
Climate change is real. Industry must now lead and not depend on government.
Jeff Immelt, the CEO of General Electric
3) The enemy of my enemy is my friend. When President Trump announced that the U.S. would withdraw from the Paris climate accord, he united the other nations of the world in a battle against climate change. Trump also sent a clear message to captains of industry: business can’t depend on government when it comes to climate change. As Jeff Immelt, the CEO of General Electric, put it in a tweet, “Climate change is real. Industry must now lead and not depend on government.”
4) Leading from behind. Nelson Mandela equated a great leader with a shepherd: “He stays behind the flock, letting the most nimble go out ahead, whereupon the others follow, not realizing that all along they are being directed from behind.” Last year the Task Force on Climate-Related Financial Disclosure (TCFD) led by Michael Bloomberg issued its widely-acclaimed recommendations for climate-related financial disclosures to be included in annual shareholder reports. Over time, the TCFD will create a ‘race to the top’ in climate disclosure as laggards follow the nimble.
5) Where you stand depends on where you sit. In the 2016 election Trump voters were predominately older and male. Women supported Clinton over Trump by 54% to 42%. Young voters (ages 18-29) preferred Clinton to Trump by a 55%-37% margin. Trump has called climate change a hoax “created by and for the Chinese in order to make U.S. manufacturing non-competitive.” Many of his supporters appear to agree. But women and millennials tend to view climate change differently. Surveys show that 90% of millennials and 80% of women are interested in environmental, social and governance (ESG) investment strategies. Since 2014 women and millennials are responsible for the doubling of ESG assets to $8.1 trillion worldwide— and this trend seems likely to continue.
Over time, Climate-Related Financial Disclosure will create a ‘race to the top’ as laggards follow the nimble.
6) Absence of evidence is not evidence of absence. It’s no longer reasonable for corporate boards and managers to blindly assume that climate risks are immaterial. Sound governance dictates that boards have reasonable assurance about management’s capability to identify and address such risks. Climate-related materiality assessments should be supported by defensible, quantitative analysis that can be shared with investors. Silence will speak volumes. For more on how to measure the potential future financial impacts of climate change, see The Materiality Meter.
7) A battle of titans. In 2017 shareholders defeated ExxonMobil management in an epic rebellion over climate change disclosure. Investors with 62.3 percent of shares directed management to report on the potential impact to the company of global measures designed to keep global temperature rise within 2°C. Management later conceded. ExxonMobil’s largest investors are BlackRock and Vanguard with combined assets under management in excess of $10 trillion. The decades long debate over whether climate change is material to reasonable investors is over.
The new reality that climate change poses a material financial risk will mean that many more companies will need to quantify the potential future financial impacts of climate change and disclose this information in their shareholder reports. In 2018 climate change will cease to be a Platonic abstraction and will morph into the “material world” for which corporations and investors must prepare… and share.
To track the outcome of this prediction join the LinkedIn Group on Climate-Related Financial Disclosure. To help make it come true, share it with your network.
Greg Rogers is a CPA, attorney and entrepreneur working at the intersection of climate change, environmental accounting and financial disclosure. He is the uthor of Financial Reporting of Environmental Liabilities & Risks after Sarbanes-Oxley (Wiley).