The abundant increase in quantitative data detailing the effects of climate change has prompted many investors to evaluate the environmental risks and opportunities in their investments. This enables them to better assess their investee companies’ preparedness to thrive in an economy increasingly impacted by a changing climate. “It is not only completely possible for investors to include these factors in their decision-making… [but] it helps you identify a better business,” said Bruno Bertocci, Global Sustainable Equity Strategy lead at UBS Global Asset Management.
A recent study, published by The Carbon Disclosure Project (CDP) and Sustainable Insight Capital Management, analyzed the financial performance of 702 companies that disclosed greenhouse gas (GHG) emissions to the CDP. The study revealed that companies in the top quintile of emissions disclosure to CDP, those that detail business-specific risks and opportunities related to climate change, command a premium of 5.2% return on equity, 18.1% cash flow stability, and 1.6% dividend growth. While reporting GHG emissions and considering climate change impacts in strategic planning does not ensure a company’s financial success, it does point to forward-looking leadership teams and well-run companies. Thus, private equity fund managers could consider GHG management information as another criterion to assess quality of potential acquisitions’ leadership teams during due diligence.
In an effort to provide governments, investors, and businesses with additional quantitative data on climate change impacts, financial mavens, like former New York City Mayor Mike Bloomberg, former U.S. Treasury Secretary Hank Paulson, and retired Farallon Capital founder Tom Steyer, launched the Risky Business initiative to measure U.S. economic risk driven by impacts of climate change. “If the United States were run like a business, its board of directors would fire its financial advisers for failing to disclose the significant and material risks associated with unmitigated climate change,” noted their blog.
The results of their work will be released in the coming months.
While recent Environmental Protection Agency (EPA) regulation aims to mitigate adverse impacts by cutting domestic coal-fired power plant emissions 30% by 2030, from a 2005 baseline, the United Nations Framework Convention on Climate Change will meet in Lima this December to draft a treaty to commit the world’s largest economies to begin reducing carbon pollution in 2015.
As global efforts to mitigate climate change impacts are expanding and drawing greater attention from heavy hitters in the financial industry, this issue is no longer merely an environmental concern but rather an economic reality that governments, investors, businesses, and individuals must face. As more data becomes available, investors can better assess companies’ resiliency during due diligence to determine their ability to adapt to the shifting economic and political landscape as it is shaped by the changing climate.