Published on Tuesday, May 4, 2021
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“There will be a point that not taking into account climate risk could be taken as negligence.”
Virtually every company knows that climate change presents a real risk to its business, says the latest report from the Sustainability Accounting Standards Board (SASB). But there’s something missing.
While the “overwhelming majority” of US and EU companies—94%—"address climate risk in their mainstream financial reports, only a few provide quantitative metrics beyond GHG emissions.” About 80% of companies mention facing physical risks from changing climate, only one in five try to quantify the financial impact.
The lack could have two major implications in the form of either leaving prospective investors less interested in a company or property, or in eventual legal action should something go wrong.
Institutional investors “have a responsibility to ensure that the money is invested in a risk-averse way,” Etienne Cadestin, global CEO of Longevity Partners, tells GlobeSt.com. “That’s why a lot of pension funds when they’re allocating cash will require investment managers to provide the safeguards to make sure the money is invested in a way that’s responsible, resilient, and future proof.”
“There will be a point that not taking into account climate risk could be taken as negligence,” Cadestin adds. And when negligence appears, so do shareholder lawsuits.
The issue is not just current risk. “When you’re talking about climate change, on average the expectations of flooding events now versus climate change in the coming decades, how does the likelihood shift?” MSCI's Head of Real Estate Solutions Research, Will Robson, tells GlobeSt.com. “There’s one thing in measuring your exposure to flood risk in terms of an historical how floods happened in the past or your current carbon emissions. But projecting forwards, what’s going to happen to the climate and how that impacts physical risks and carbon reduction, those models,” as well as calculating net present values for the future figures.
The concerns aren’t theory. According to the SASB report, hundreds of large investors have joined initiatives representing the US that are requiring greater transparency. Securities regulators across the globe have begun to consider the implications in protecting investors; ensuring fair, efficient, and transparent markets; and the reduction of systemic risk.
“Accordingly, regulators around the world have begun to encourage or require companies to disclose climate-related information to investors,” the report said.
Given the complexities of modeling required, funds, investment firms, and others holding real estate are already finding themselves in need to more explicitly describe the financial implications of the climate change risks they face today and going forward.