Risks of considerable financial losses and drops in value.
Companies that do not plan for the inevitable low-carbon economy resulting from climate action sparked by the Paris Climate Change Agreement risk considerable financial losses and drops in value, argue a pair of leading economists from the Grantham Research Institute on Climate Change and the Environment.
Nicholas Stern and Dimitri Zenghelis, respectively Chairman and Co-Head of Climate Policy at Grantham, urge the Financial Stability Board (FSB) to deliver ambitious reporting guidance on climate risks.
To do so, they submitted a policy paper to the Task Force on Climate-Related Financial Disclosures. Announced at the UN Climate Change Conference in Paris at the end of last year, the task force’s mission is developing voluntary climate risk disclosure procedures for companies. The task force was created by the Financial Stability Board and is chaired by UN climate envoy Michael Bloomberg. A final report is expected by the end of the year.
Nicholas Stern and Dimitri Zenghelis argue that carbon-intensive companies are not ready for the impact of the Paris Agreement’s commitments.
They discuss a “gap between what politicians have signed up to in Paris and what markets and fossil fuel companies are assuming. This gap should alarm policy-makers and central bankers: it suggests either asymmetric information or a lack of credibility in policies”.
The two economists believe in immediate action. “Climate risks and climate policies are likely to have a profound impact on firms in the global economy in the years to come. The commitments expressed by almost every country in the world in the recent Paris Agreement cannot be safely dismissed.”
MM. Stern and Zenghelis first call for clearer definition of material risks.
Their policy paper recommends that businesses disclose the carbon exposure of their past activities and assess future risks. It suggests carrying out stress tests and strategies related to emissions reduction policies.
“All companies will benefit from building resilience and planning for decarbonisation, through access to new technologies and markets and compliance with new policies, but the degree to which they expect to benefit will depend on the costs of taking action and the distribution of risks”, says the paper.
“What matters for climate risk is that companies have a strategy in place to transition their business models to ones that are valuable once serious climate policies are in place, or once climate damages have accrued”.