Climate change is rapidly becoming one of the core challenges of the 21st century for corporate directors and institutional investors. As this report documents, in the absence of preventive and adaptive measures, multi-billion dollar financial losses are distinctly possible if not probable. As the potentially devastating economic consequences for investors, individual companies and entire industry sectors come into clearer focus, the onus is being placed squarely upon company directors, pension fund trustees, and institutional investors to respond.
Climate change is rapidly becoming one of the core challenges of the 21st century for corporate directors and institutional investors. As this report documents, in the absence of preventive and adaptive measures, multi-billion dollar financial losses are distinctly possible if not probable. As the potentially devastating economic consequences for investors, individual companies and entire industry sectors come into clearer focus, the onus is being placed squarely upon company directors, pension fund trustees, and institutional investors to respond.
Unfortunately, U.S. corporate directors and institutional investors are, virtually without exception, in a state of double denial. First, they are in denial about the very existence, much less the magnitude, of the threat itself. Second, and paradoxically, they also seem oblivious to both the practicality and the affordability of early mitigation measures.
Company directors and institutional investors in the United States currently control – and have legal responsibilities for – roughly $7.4 trillion of financial assets invested in corporate equities, and a significant proportion of it could be at risk from climate change.
The risks here are two-fold: (1) the economic/financial risk from the damages and remediation due to climate change itself (directly to companies and indirectly through general socio-economic disruptions in the US and abroad), and (2) exposure to the costs of greenhouse gas emissions in any regime to mitigate climate change. These are not necessarily applicable to the same corporate entities. The first set of risks affects companies vulnerable to sea level rise, weather extremes, temperature and precipitation changes, etc.; the second set of risks affects carbon-intensive companies, which would face the costs of any mitigation regimes.
Neglecting to assess these risks is neither prudent nor responsible. The more information on climate-related damage accumulates, the more the refusal to examine these risks carries the potential for breach of fiduciary duty. Corporate board members and institutional investors can no longer ignore corporate practices that, over time, could result in tens of billions of dollars of losses to companies and their shareholders. To fulfill their fiduciary duties, investors and directors now must understand which industry sectors and companies are exposed to the greatest risks, what measures if any are being taken to reduce them, and how effective they are likely to be.
In contrast to their European counterparts and competitors, U.S. companies and financial institutions are lagging behind. However, four powerful forces are converging rapidly to accelerate the need for action: strengthening political consensus within governments for action to address the climate change threat; growing evidence that environmental and social issues are directly linked to companies’ financial performance; rising shareholder activism; and increasing demands for greater corporate disclosure.
Sadly, U.S. fiduciaries have been slow to respond to these challenges. They have tended either to ignore the climate change phenomenon altogether, or to subscribe to the increasingly discredited view that solutions must inevitably be costly, both to individual companies and to the entire U.S. economy. When compared to the traditional U.S. enthusiasm for innovation and technological substitution, this is an uncharacteristically pessimistic and timid point of view with little grounding in fact. Recent studies by the National Academy of Sciences and others create serious doubts about the economic cost thesis. Indeed, it is increasingly evident that the costs of inaction are likely to far outweigh the costs of action.
The bottom line, as this report documents, is straightforward: climate change represents a potential multi-billion dollar risk to a wide variety of U.S. businesses and industries. It should, therefore, command the same level of attention and urgency as any other business risk of this magnitude.
But what, precisely, must company directors and institutional investors do to discharge their fiduciary duties in a responsible and prudent fashion in the face of the economic threats posed by climate change?