These are announcements which would have been unthinkable just 18 months ago – large, universal share owners publicly stating they may take a stand, even in the absence of a specific shareholder resolution, on governance relating to climate risk.
What this suggests is that investors won’t be reassured a company is managing climate risks by beautifully laid-out sustainability reports or by using the right phrases to acknowledge the seriousness of climate change.
Investors are signalling they are expecting much more robust and thorough reckonings of climate risk from the companies they invest in.
Take this example from State Street, the world’s third-largest asset manager, which said it would begin dividing the most exposed companies into “Tier 1” and the less-impressive “Tier 2”.
A Tier 2 company might be “…an energy company that identified climate risk as a concern in its financial reports but only provided emission data against annual goals,” State Street said.
“Therefore, it failed to demonstrate to investors how the company is managing the potential impacts of climate change on the company’s long-term strategy.”
In other words, simply measuring your emissions – also known as ‘carbon footprinting’ – simply isn’t enough. To become Tier 1, State Street says, a company might have to conduct a “board[s] assessment of regulatory and investment/consumer trends pertaining to climate change” – and then it would need to disclose how it was responding to the assessment.
Of course, investors too are still building up their expertise in climate risk – some investors are arguably much further advanced in understanding climate risks than the companies they invest in.
This is in part because of the long-term focus of pension and superannuation funds, but it’s becoming ramping up as asset owners and managers are identified as exposed to climate risks by the FSB taskforce. APRA meanwhile has clearly stated banks, insurers and superannuation funds will all be increasingly expected to show how they are managing climate risk.
The Investor Group on Climate Change, which represents more than $A1 trillion of Australian assets under management, and the last week published a guide for investors to conduct their own climate disclosure.
It takes them through four stages: from developing their investment beliefs regarding climate risk to future-proofing against the shifts and policies required to limit warming to 1.5C – 2C, reviewing proxy voting policies, and fully assessing vulnerability and exposure to the physical impacts of climate change.
It explores the merits and shortcomings of using different metric approaches, such as carbon footprinting, using specialist ratings providers, and appropriate responses to findings. It demonstrates climate risk is being thought about in an unprecedented level of detail.