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EXECUTIVE PERSPECTIVE: A look on the bright side

Antony Currie

12 Dec 2018

Originally published on Reuters Breaking Views.

A climate change on carbon is coming to Wall Street, and not a moment too soon. Global greenhouse-gas emissions accelerated in 2017, according to the latest data from the Global Carbon Project, as economic growth picked up, powered in part by Asian countries burning more coal. Even the U.S. federal government acknowledged last month that extreme weather and other effects of climate change would cause growing losses to American industry, not least agriculture, and impede economic growth.

Those risks don’t guarantee action. The administration of President Donald Trump has threatened to remove electric-vehicle subsidies. And it rejected the stark warnings 13 U.S. agencies presented in November’s investigation into global warming.

The White House has also taken its naysaying abroad. On Saturday, with support from Kuwait, Russia and Saudi Arabia, it forced the 197 countries attending the United Nations climate conference in Katowice, Poland to water down support for a recent report on tackling climate change commissioned by UN member states.

Meanwhile, just 10 of the countries that signed pledges at the 2015 climate confab in Paris have submitted long-term plans to reduce emissions.

Yet the private sector is stepping up as more investors price in the risks of a warming planet. And in parts of the world, regulations will begin to have a greater impact. Breakingviews outlines four areas that promise further progress.

Climate-activist investors get pushier

Shareholders have moved on from simply lobbying companies to provide better information on how global warming will affect their businesses. Executive pay is the new target, as Royal Dutch Shell underscored with its December pledge to tie compensation to reducing greenhouse-gas emissions.

The Anglo-Dutch company’s agreement with more than 300 investors managing $32 trillion in assets doesn’t kick in immediately, doesn’t yet include its supply chain, and is short on other essential details. But getting a commitment from the world’s ninth-largest emitter of greenhouse gases, according to Thomson Reuters data, is an important milestone.

Expect not just more, and better, pacts like the one Shell sealed, but also for investors to target companies – and their executives and directors – that refuse to play ball.

The law of large numbers comes into force

A quarter of the $47 trillion in assets that is professionally managed in the United States now considers ESG – environmental, social and governance – criteria in their investing processes. That, at least, is how the Forum for Sustainable and Responsible Investment sees it.

Corporate-governance issues, such as splitting the chairman and chief executive roles, account for the lion’s share of those assets. And simple exclusionary strategies – no tobacco or fossil-fuel companies, for example – also play a big role, though have little direct impact on reducing emissions.

But the amount of assets brought into the ESG fold – up 38 percent in two years – is encouraging. That’s likely to have a snowball effect as more money managers will feel they have to offer sustainability products to their clients. That increases the chances that investors will delve deeper into the environmental risks – and opportunities – companies face.

Carbon prices start to bite

The European Union’s Emissions Trading System – the world’s first and largest such credits-trading venue – has been largely a bust so far. The cost of emitting a tonne of carbon dioxide was around 20 euros in early December, well below the range of 50 to 100 euros that climate experts believe is necessary to curb emissions.

Such a level would force executives to factor that cost into decisions on investing in new projects, and perhaps how they deal with their supply chains, which can account for 90 percent or more of some companies’ overall emissions.

The problem, as one European official complained to Breakingviews, is that companies and investors suffer from “sheer myopia.” They largely ignore the fact that emissions allowances shrink each year and will be a fifth lower by 2020 than when the scheme, which covers around 45 percent of EU carbon emissions, began in 2005. They shrink faster after that, hitting more than 40 percent below the starting level by 2030.

Basic supply and demand ought to push the price up. Arguably that has already started, with a gain of 150 percent in the first 11 months of 2018. As more players cotton on to the fact that there will be fewer carbon allowances to go around, the sky may be the limit.

Data gets more useful

More companies are providing information on their carbon emissions, water use and the like, but the statistics are often cut and presented in different ways. A December analysis by Moody’s found that although four U.S. energy utilities published their carbon emissions based on recommendations from the Task Force on Climate-Related Financial Disclosures, none was easily comparable with its peers’.

That is quickly improving. Organizations like climate-lobby group CDP and the Sustainability Accounting Standards Board are standardizing the types of information they ask for as well as how they are collated and presented.

New regulations are also cropping up. On Dec. 4 at the UN conference in Katowice, the European Union’s Finance and Economic ministers agreed to require banks to disclose their ESG risks in three years. They’re also investigating whether to make ESG factors an integral part of regulatory stress tests and to give banks capital relief on green and brown investments. That ought to have a big impact on financing climate-friendly projects.

Corporations are stepping up too. Trucost, a unit of S&P, recently completed a pilot program with 13 companies to identify how to align their businesses to the United Nations’ 17 sustainable-development goals, which cover everything from water use and greenhouse-gas emissions to supply-chain management and poverty. They found that 87 percent of the companies’ combined revenue of $233 billion could benefit from adapting to or taking advantage of the SDGs.

Each of these developments can be a valuable weapon against climate change. They also should reinforce each other, magnifying the overall impact. That won’t solve everything, but it’s a powerful sign of hope in a world churning out bad news.

(This is a Breakingviews prediction for 2019. To see more of our predictions, click here.)

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