A new financial tool developed by the investment firm South Pole Carbon, in partnership with the Swiss Federal Institute of Technology, provides greenhouse gas emissions profiles of more than 40,000 publicly listed companies. This index is aimed at encouraging greater disclosure from companies while, hopefully, also pushing investors to build more responsible portfolios.
“Investors have long been aware that the greenhouse gas profile, especially of major emitters like electric utilities, is a potential liability,” said Paul Bledsoe, a senior adviser on energy issues at the Bipartisan Policy Center.
The natural gas industry, for example, has cited the possibility of regulation of greenhouse gas emissions by the Environmental Protection Agency to help explain its market rise next to coal’s loss of market share. And a recent open letter to the Bank of England that included signatories from Oxford University and the London School of Economics admonished the bank to “investigate how the U.K.’s exposure to high-carbon investments might pose a systemic risk to our financial system.”
Nonetheless, in the absence of strong greenhouse gas regulation, it is unclear how significantly emission patterns contribute to investor decision-making, Mr. Bledsoe said. Over the last three decades, many investors have focused increasingly on short-term returns. For those who do, the shifting winds of policy debate or the comparatively glacial process of policy development are largely irrelevant. That means such considerations tend not to surface in share value.
“Most investing is done very quickly,” said Brad Gentry, a professor at Yale School of Forestry and Environmental Studies who specializes in the connection between private investment and environmental performance. “This is a huge problem in terms of reflecting” the potential risk contained in a company’s greenhouse gas emissions.
And yet, in not-so-subtle irony, one of the direct effects of these emissions has unequivocal influence over many investments: A recent survey by the nonprofit research group Ceres found that 77 percent of asset managers view climate change as a material risk or opportunity.
An investment firm might forgo investment in a beachside resort in light of the risk from rising seas, but that same firm would have little problem investing in Exxon Mobil, even if its emissions are contributing to rising seas.
Beyond its debated usefulness to investors, Mr. Gentry indicated that companies were using this data in surprising and often sophisticated ways, scrutinizing, for example, the potential for high emissions to tarnish a brand. “This kind of information is used widely by companies, and it’s their behavior you ultimately want to affect,” he said.
These emissions profiles can also feed information into the growing area of legally mandated disclosure initiatives, like the Greenhouse Gas Reporting Program in the United States and coming regulation in Britain that will target 1,600 companies on the London Stock Exchange.
Hiding at the heart of indexes like this one is an unresolved question about the private sector’s role in limiting greenhouse gas emissions: What is the ideal balance between government and private involvement in any transition away from fossil fuels or other major sources of greenhouse gases? transition? How much can — or should — business spur change, and how much can — or should — government policy exert pressure? And what mechanisms might most efficiently push capital from high-carbon to low-carbon technologies and industries?