Blog 13.09.16

Pricing Climate Risk

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Photo: Flickr – Chris Potter

In a new report published last week, Blackrock, the world’s largest asset manager, called for investors to factor climate change into decision making.

In the report, Blackrock firmly states that climate risk has long been underappreciated and underpriced, and that by integrating a data-driven understanding of how a company is planning for and anticipating climate risk, investors will be insulated in the long-term, and may even benefit in the short term.

“Climate risk is an enduring challenge,” Ewen Cameron Watt, senior director for BlackRock’s Investment Institute, told Reuters. “This is a source of portfolio risk and a source of social risk, which needs addressing.” Fortune

Along with significant risks, there are many opportunities when it comes to climate change – “curbing carbon emissions requires significant spending on green infrastructure and a reduction in fossil fuel subsidies. This creates large investment opportunities in areas that attract capital or industries at risk of disruption.” And, the firm has found that companies that cut their carbon footprint have performed better than their peers who did not make those changes.

But an important gap remains – that of reliable, comparable, transparent data. Blackrock is working to develop a “holistic climate scoring system that can be used to climate-proof portfolios.” And while the availability of the necessary data has gotten better, in some places it is still lacking. Also lacking – an understanding from companies about what and how an investor community wants to see ESG information.

On both sides of the equation – asset owners and companies – the report provides recommendations.

  • Asset owners and financial institutions need to hire the talent and direct the right resources to be able to analyze and use ESG data productively. The report also advocates for “dialogue over divestment,” acknowledging the influence that the investor class has over how a company operates, now and in the future.
  • Companies have gaps to make up to, specifically when it comes to strategy and transparency. Rather than separate ESG and sustainability from company strategy, the report calls for a true integration of the two, enabling companies to leverage opportunities and plan for risks. On the communications side, the report recommends improved disclosure of climate factors, as well as two-way engagement with investors.

As we think of the future of reporting and communications, one thing is for sure – the old model of a one-size-fits-all report no longer makes the grade.

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