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