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Threats of  undisclosed  climate  risk  to  stock   exchanges  re-­‐emphasise  need  to  improve   disclosure    

Corporate climate  risk  disclosure  reaches  milestone  as  threats  of   climate  change  enters  business  mainstream                           Authors:  J-­‐C  Amado  and  Peter  Adams,  Acclimatise  


Threats of   undisclosed   climate   risk   to   stock   exchanges   re-­‐emphasise   need  to  improve  disclosure     Corporate   climate   risk   disclosure   reaches   milestone   as   threats   of   climate   change   enters   business  mainstream     Stock  exchanges  have  reached  a  milestone  in  recognising  the  risks  climate  change  poses  to   investments.   The   Carbon   Disclosure   Project’s   (CDP)   new   report,   “Climate   Resilient   Stock   Exchanges  –  Beyond  the  Disclosure  Tipping  Point,”  shows  that  for  the  first  time  more  than   50%   of   in   the   world’s   31   largest   stock   exchanges   are   providing   climate   disclosure   information   to   investors.   This   tipping   point   marks   the   start   of   climate   risk   management   being   mainstreamed   into   investment   decision-­‐making.   However,   a   number   of   stock   exchanges   maintain   low   levels   of   climate   risk   disclosure   and   are   vulnerable   to   losses   in   capitalisation  and  competitiveness.   The  CDP  report  cites  a  strong  correlation  between  long  term  value  creation  and  climate  risk   disclosure,  yet  progress  towards  climate  risk  mainstreaming  has  not  been  evenly  distributed.   European   exchanges   have   made   the   most   progress,   with   Northern   American,   Asian,   and   developing   country   exchanges   lagging   behind.   The   twelve   exchanges   with   the   highest   disclosure  rates  are,  in  decreasing  order:   • • •

With over   80%   disclosure   rates:  London,  BME  Spanish  Exchanges,  Deutsche  Borse,   Swiss  SIX,  Nasdaq  OMX  Nordic.   Between  70  and  80%:  Johannesburg,  Australian  Securities  Exchange,  Euronext.   Between  60  and  70%:  New  York,  Toronto,  Korea,  Tokyo.  

Significantly, these   twelve   best   performing   exchanges   represent   five   of   the   largest   in   the   world.   The   single   biggest,   the   NYSE,   ranks   9th   for   overall   for   disclosure,   however,   the   second   largest   exchange   (NASDAQ)   and   the   fourth   largest   (Hong   Kong)   lag   further   behind.   A   further   twelve   stock   exchanges   have   disclosure   rates   of   less   than   20%,   making   up  worst  performers   in  the  survey.  The  CDP  report  suggests  that  the  cluster  of  developing-­‐region  markets  at  the   bottom   of   the   list   can   partly   be   explained   by   CDP’s   focus   on   engaging   developed   market   exchanges   to   date.   Whatever   the   reasons   for   this   difference   in   disclosure   rates,   it   is   clear   that  some  exchanges  are  more  vulnerable  than  others  to  undisclosed  climate  risks.   To   increase   climate   risk   disclosure   worldwide,   CDP   calls   for   a   straightforward   roadmap   for   stock   exchanges   to   demand   further   engagement   and   transparency   from   participating   companies.  This  road  map  would  promote  a  collaborative  approach  centred  on  five  criteria:   • • • •

Guidelines: granular  and  exacting,  with  hard  dates  and  specific  metrics;   Key  metrics:  for  risk  and  strategy,  verification  targets,  and  emissions  reduction;   Indices:  rigorous  and  detailed,  to  provide  transparency  and  confidence  to  investors;   Capacity   building:   engagement   programs   for   companies   and   investors,   to   raise   awareness  and  build  best  practices;  and      

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  Sector  materiality:  recognising  and  acting  on  the  unique  impacts  and  vulnerabilities   of  different  sectors.  

This report   is   one   of   several   recent   publications   highlighting   the   materiality   of   climate   change  for  investment  performance.  In  2011,  Mercer  released  “Climate  Change  Scenarios  -­‐   Implications   for   Strategic   Asset   Allocation.”   The   report   assessed   the   risks   that   climate   change   poses   to   strategic   asset   allocation.   Using   their   TIPTM   Framework,   these   risks   were   divided   into   three   categories:   technology   (ability   to   reduce   emissions),   impacts   (how   bio-­‐ physical   changes   threaten   investments),   and   policy   (changes   in   cost   of   emissions).   Mercer   found   that   climate   change   factors   could   contribute   significantly   to   overall   investment   portfolio   risk,   alongside   traditional   return   drivers   such   as   equity   risk   premium,   credit   risk   premium  and  illiquidity  premium.  More  specifically,  taking  one  portfolio  with  a  typical  asset   mix,  the  climate  change  policy  and  technology  factors  can  contribute  up  to  10%  and  1%  of   overall   portfolio   risk   respectively.   Mercer   recommended   some   straightforward   steps   towards  recognising  and  managing  these  risks:     1. Investors  need  to  think  about  diversification  across  sources  of  risk  rather  than  across   traditional  asset  classes.   2. Managing  climate  change  risks  could  lead  to  increased  allocation  of  climate  sensitive   assets,   as   increasing   exposure   to   sensitive   assets   may   be   the   best   way   to   manage   risk  to  a  portfolio.   3. Investors   can   take   immediate   steps   to   the   resilience   of   their   portfolios   to   climate-­‐ related   risks,   such   as   climate   risk   assessments;   assessment   into   on-­‐going   strategic   reviews;  creation  of  climate  “hedges;”  sustainability-­‐themed  indices;  and  improved   disclosure  of  climate  risks.   Unfortunately   Mercer’s   economic   model   did   not   include   the   physical   impacts   of   climate   change,  assuming  that  over  the  next  twenty  years  physical  changes  are  unlikely  to  have  any   effect   on   portfolio   risks.   This   assumption   is   surprising   considering   the   amount   of   evidence   showing  that  human  activities  have  already  modified  the  Earth’s  global  energy  balance  and   the   overall   risk   of   adverse   weather   events.   While   it   is   challenging   to   probabilistically   attribute   single   weather   events   to   mane-­‐made   climate   change,   scientific   studies   analysing   how   the   risk   of   extreme   weather   events   has   increased   because   of   the   warming   trend   are   multiplying.   For   example,   James   Hansen   (NASA)   and   colleagues   report   that   extremely   hot   temperatures  (temperature  anomalies  associated  with  standard  deviations  superior  to  3  in  a   given  time  period)  were  observed  in  much  less  than  1%  of  the  Earth’s  surface  between  1951   and   1980,   whereas   they   covered   10%   in   2003-­‐2011.   The   scientists   conclude   that   the   distribution  of  seasonal  mean  temperature  has  shifted  towards  higher  temperatures  and  the   range   of   temperature   extremes   has   increased;   in   other   words,   the   risk   of   extreme   heat   waves,  such  as  the  ones  experienced  in  South-­‐western  US  in  2011  or  in  Moscow  in  2010,  has   increased  because  of  climate  change.  Previously  two  studies  have  led  to  similar  results:   -­‐

In 2011,  a  paper  published  in  the  Proceedings  of  the  National  Academy  of  Sciences  of   the   USA   showed   how   a   fivefold   increase   in   the   number   of   high   record   temperatures   in  July  in  the  Moscow  area  explains  with  an  80%  probability  that  the  2010  July  heat   wave  in  Moscow  would  not  have  occurred  without  climate  change  (Rahmstorf  et  al.,   2011).    

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-­‐

  In   2003,   scientists   at   the   UK   Meteorological   Office   and   University   of   Oxford   have   showed   that   human   influence   has   doubled   the   risk   of   devastating   heat   waves,   like   the  European  2003  summer  heat  wave  (Stott  et  al  2003).    

Despite scientific   uncertainty,   it   is   increasingly   clear   that   human   influence   has   already   influenced  the  climate  system  and  contributes  to  explain  the  recent  trend  of  higher  extreme   weather   events   around   the   globe.   Climate   change   impacts   have   caused   major   market   losses   and  will  continue  to  do  so  unless  adaptation  strategies  are  implemented.     With   the   outcome   of   the   Durban   Conference   of   the   Parties   of   the   UN   Framework   Convention   on   Climate   Change   (COP17)   pushing   an   international   framework   to   reduce   global   greenhouse   gas   emissions   back   until   2020,   investors   and   companies   ought   to   recalibrate   the   focus   of   their   climate   risk   management   practices   and   disclosure   away   from   policy  and  towards  physical  impacts.     It   is   critical   that   markets   and   businesses   recognise   the   systemic   risk   climate   change   poses.   Mercer’s   2011   survey   of   how   investors   are   integrating   climate   change   considerations   into   strategic   asset   allocation   shows   that   interest   is   picking   up   in   relation   to   risk   management,   SAA  and  engagement  strategies.  Stock  exchanges  failing  to  adapt  and  improve  disclosure  are   vulnerable  to  financial  losses  and  a  loss  of  their  competitiveness.       Acclimatise   is   a   specialist   advisory   and   digital   application   company   providing   world-­‐class   expertise   in   climate   change   adaptation   and   risk   management.   Acclimatise   bridges   the   gap   between  the  latest  scientific  developments  and  real  world  decision-­‐making,  helping  its  clients   to   interpret   this   knowledge   within   the   context   of   their   own   strategies,   processes,   capabilities   and  stakeholders.     Sources   Carbon  Disclosure  Project.  (2011)  “Climate  Resilient  Stock  Exchanges  –  Beyond  the   Disclosure  Tipping  Point”  https://www.cdproject.net/CDPResults/CDP-­‐2011-­‐climate-­‐ resilient-­‐stock-­‐exchanges-­‐white-­‐paper.pdf   Mercer.  (2011)  “Climate  Change  Scenarios  -­‐  Implications  for  Strategic  Asset  Allocation”   http://uk.mercer.com/articles/1406410   Stott,  P.  et  al.  “Human  Contribution  to  European  Heatwave  of  2003”  Nature  432,  610-­‐614  (2  December  2004)   |  doi:10.1038/nature03089;  Received  21  May  2004;  Accepted  5  October  2004   Hansen  et  al.  2011:  

http://www.columbia.edu/~jeh1/mailings/2012/20120105_PerceptionsAndDice.pdf Rahmstorf  et  al.  2011  :  http://www.pnas.org/content/early/2011/10/18/1101766108.abstract     Mercer  2012  :  http://www.mercer.com/climatechange    

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Threats of undisclosed climate risk to stock exchanges re-emphasise the need to improve disclosure  

Corporate climate risk disclosure reaches milestone as threats of climate change enters business mainstream

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