Marcus Norton explains why schemes must use corporate climate data and analysis to understand their exposure to climate risk.
Last year's Hurricanes Harvey and Irma in the US have caused an estimated $70bn (£51.67bn) in economic damage and brought oil refineries in Texas to a standstill, demonstrating the physical and human loss as well as the financial from extreme weather events.
The 2017 global climate change analysis released by CDP finds that corporates increasingly understand the serious risks that climate change poses to their business models, supply chains and physical assets.
Undeniably, there is momentum in the corporate world for increased transparency and reporting of climate risk and opportunity. Companies, investors, and pension scheme managers and trustees all want to have a better understanding of how companies are factoring climate risk and opportunity into their business models.
Indeed, our analysis of over a thousand of the world's biggest, most environmentally-impactful companies found that 98% of companies now have board- or senior management-level responsibility for climate change, with nine out of ten having a target in place to reduce carbon emissions. Additionally, over a third (36%) of companies are taking advantage of the shifts towards a low-carbon economy by offering low-carbon products from electric vehicles to zero-energy buildings.
These developments all point towards the same conclusion: pension trustees and managers must understand and manage climate risk and opportunity in their portfolios.
The Bloomberg/Carney Model
The Bloomberg/Carney Task Force on Climate-Related Financial Disclosures (TCFD), supported by the G20, builds upon and complements the work done by CDP to mainstream corporate disclosure and encourage companies to report on and reduce their emissions.
Specifically, the TCFD wants companies to disclose their management of climate in four key areas:
- Governance: climate-related risks and opportunities, board and senior management engagement in climate issues.
- Strategy: actual and potential impacts of climate-related risks and opportunities to the organisation's business model.
- Risk management: the processes used to identify, assess and manage climate-related risks.
- Metrics and targets: the tools to measure, asses and manage relevant climate-related risks and opportunities.
Some of the most important metrics that companies can use to track their climate impacts and management processes include putting an internal price on carbon and setting science-based targets, i.e. commitments to decarbonise their businesses in line with the stated goal of the Paris Agreement to keep global temperature rise well below 2 degrees Celsius.
According to CDP, 14% of companies in their sample are committed to setting science-based targets - including market leaders such as AkzoNobel and Unilever - while 32% of companies are now deploying internal carbon pricing, with a further 18% reporting that they plan to do so within two years.
These metrics provide pension fund managers and trustees with a straightforward framework to better understand the climate-related financial risks and opportunities embedded in their schemes.
Managing climate risk and protecting value
Along with the 800+ investors behind CDP's request to disclose, major institutional investors and pension providers have also thrown their weight behind the TCFD recommendations. BlackRock has made it a top engagement priority to ask companies how they are assessing the risk that climate change may pose to their operations, while Aviva has announced that it will vote against the board of any portfolio company that fails to publicly disclose the risks posed to their business model by climate change. These private sector initiatives dovetail with regulatory action. In November 2016 the European Parliament passed a new pensions directive requiring EU workplace pension funds to consider environmental, social and governance (ESG) issues, while the UK government has officially endorsed the TCFD recommendations and the French government is legislating for the recommendations to be mandatory.
The price of inaction on climate could be eye watering. A recent study estimated that up to $43trn of assets will be at risk because of climate change by 2100. Meanwhile, by taking early action we safeguard not only the planet but also the financial interests of pension beneficiaries. For example, research last year found that the 193 companies who made it onto CDP's Climate A List produced 6% higher returns on average compared to other brands. Consumers are increasingly asking where their pension is being invested and want financial products that exclude carbon emissions intensive companies.
Catastrophic climate change and value destruction cannot be prevented without the private sector. By using corporate climate data and analysis to understand risks, protect investments and seize opportunities, fund managers and trustees are equipped to help ensure that their portfolios are well-buffered against climate risk.
Marcus Norton is chief partnerships officer and general counsel at CDP, the non-profit global environmental disclosure platform formerly known as the Carbon Disclosure Project
The Picking up the pace: tracking progress on corporate climate action and the 2017 Climate, Water and Forests A Lists reports are available on the CDP website.
 The Economist Intelligence Unit: https://www.eiuperspectives.economist.com/sites/default/files/The%20cost%20of%20inaction_0.pdf
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