The push to make climate-risk disclosures mandatory for public companies is not expected to see much progress under the climate-change-skeptical administration of President Donald Trump, but companies may still advance the movement without government involvement.
That’s the view of climate activists, business leaders and academics who have been working to urge companies to provide information in their financial reporting on how temperature change, rising sea levels and natural disasters are impacting their businesses.
This year’s record hurricane season, the earthquake in Mexico and devastating wildfires in California have made Americans more concerned about climate change and more willing to believe that it is contributing to extreme weather events, as a recent survey by Yale University and George Mason University found.
And companies are taking note.
“There’s no question that when you see billions, if not hundreds of billions, of dollars of losses in the U.S. alone this year, that is an economic signal that business leaders, investors and regulators need to look at [climate] as a real and material financial risk, and not just an environmental risk,” said Mindy Lubber, chief executive and president of nonprofit Ceres, a sustainability organization.
Trump’s announcement that he was pulling the U.S. out of the Paris climate agreement dismayed climate activists, but it has had one surprise effect. The backlash has helped galvanize a range of parties and constituencies determined to stick with the pact’s key goal of limiting the global temperature rise to below 2 degrees Celsius by reducing greenhouse emissions. That goal is a crucial one as insurers have said anything higher would make the world uninsurable.
At least 20 U.S. states, more than 50 cities and 60 big businesses have signed the America’s Pledge on Climate, “We Are Still In,” to confirm they are committed to meeting the Paris goals. The group, led by Michael Bloomberg, the former mayor of New York City, and California Gov. Jerry Brown, has presented an initial report to the UNFCCC and is now actively lobbying for others to join.
The pledge is not a marketing trick. Between them, the signatories represent more than half the U.S. economy, according to America’s Pledge on Climate, suggesting that companies are taking climate change more seriously than the administration is.
Bloomberg has argued that the private sector will play the biggest role in meeting the Paris goals, noting that companies have little choice. They need to be green to attract the best talent and please their customers, especially the millennial generation, who are keenly focused on environmental issues and sustainability.
“We’ve closed coal-powered plants at the same rate since Trump was elected as before, Bloomberg told Fortune magazine in October.
That’s because utilities were well-advanced in their shift away from coal and toward cleaner-burning— and cheaper — fuels, by the time Trump told the Environmental Protection Agency to start rewriting the Obama administration’s Clean Power Plan.
Shareholders are getting in on the act, too.
This year, shareholders at Exxon Mobil Corp.’s XOM, +0.73% annual meeting voted 62% in favor of the company’s making disclosures on how climate change is affecting its business. In 2015, the same agenda item garnered just 25% of votes, said Lubbers of Ceres.
At Occidental Petroleum Corp. OXY, +0.81% , the vote was more than 50%, with big institutional investors including the California Public Employee’s Retirement System, or Calpers, and BlackRock Inc. BLK, +0.92% , the world’s biggest fund manager, lending their support.
“It’s a sea change,” said Lubbers. “Investors are becoming far more active on climate risk.”
Jayashankar Swaminathan, a professor at the University of North Carolina’s Kenan-Flagler Business School and its Online MBA Program, said companies are waking up to the reputational risk attached to ignoring climate change, which is “a big driver of the risk seen by companies.”
If climate-risk disclosure were mandatory, companies would be forced to take proactive steps to reduce their carbon footprint, and it would create visibility that would allow consumers see what they are doing, he said. “That would be a good first step to drive them to do the right thing,” he said.
Disclosure should be one part of regulation, he said, along with monitoring to ensure compliance. Regulations that create a cost, such as a carbon tax or a cap-and-trade program, are another issue that companies say they find worrying.
“The other thing that has worked well is that companies can showcase themselves as examples of how to be green,” he said. “They do that not because they want to be greener or because of government, but because it’s more profitable to be green.”
He cited as one example a decision by United Parcel Service Inc. UPS, +0.31% to instruct its drivers to make no left turns, as the longer wait uses up more fuel than simply taking three right turns. UPS says it has saved millions of gallons of fuel as a result of the move, which was implemented in 2004, and reduced emissions equal to taking more than 5,000 cars off the road for a year.
Companies are waking up to the idea that reducing their carbon impact means more than just working on their own activities, said Swaminathan. It includes working with all the vendors in their supply chain to make sure they are working to reduce emissions, as well.
“If you look at the most successful companies in this area, they view it not as an obligation, but as an opportunity to improve their processes. It’s more about making their supply chains more efficient and leaner,” said Swaminathan.
The number of companies taking on their supply chain has increased in recent years with the likes of Microsoft Corp. MSFT, +1.06% , Wal-Mart Stores Inc. WMT, -0.07% and McDonald’s Corp. MCD, +0.89% all making commitments to using sustainable sourcing and other carbon-neutral measures.
Bloomberg is also head of a special task force commissioned by the group of global regulators known as the Financial Stability Board that has created a set of voluntary disclosure recommendations that aims to help investors, lenders and insurance underwriters understand more about climate-related financial risks. The Task Force on Climate-related Financial Disclosures, or TCFD, presented its findings to the G-20 meeting in Hamburg in July, but with the U.S. apparently out of the Paris agreement, the report failed to have the impact advocates were seeking.
The TCFD will submit an implementation monitoring report to the FSB in the third quarter of 2018, and its members are continuing their advocacy work, a spokeswoman told MarketWatch.
Meantime, little is expected from the Securities and Exchange Commission, which acknowledged in 2010 that climate change poses a material risk for companies but has been mostly silent on the matter since then. “We don’t have any reason to believe in this administration that that will change,” said Lubbers. “All the more reason for that mandate to come from the financial sector.”
The recent news that Norway’s sovereign fund is recommending to its government a divestment from fossil fuels is a game changer, she said. “The Norwegian fund is built on oil and gas revenue, so that fact that they are recommending not just divesting from coal but also oil and gas is a shot heard around the world,” said Lubbers. “That sends a message to every oil and gas company that their stocks are not strong enough to be invested in and will spur companies to start investing in renewable energy.”