Going ‘green’ sounds simple but isn’t easy

Future-proofing their portfolios has been racing up investors’ agendas since the Bank of England Governor Mark Carney’s 2015 landmark speech Breaking the tragedy of the horizon.

He categorised three risks from global warming: physical, such as damage to property or business disruption from extreme weather events; transition, such as a huge drop in the economic worth of fossil fuels with the rise of renewable energy; and litigation, such as lawsuits against carbon emitters for inflicting damage on the natural environment.

No wonder investors have flocked to green funds in their droves.

The Taskforce on Climate-related Financial Disclosures was formed by the International Financial Stability Board in an attempt to improve transparency around climate risks so as to enable markets to price them more accurately.

While progress on creating the necessary infrastructure of data, skills and technology has been exponential, huge gaps and inconsistencies persist.

Lately, I have been talking to some large institutional investors who have been early adopters of green funds. For them, the lack of a robust framework for assessing climate risks, with consistent definitions and reliable data, remains a major barrier.

Trying to spot companies who are reducing their carbon footprint is proving daunting for them, especially with the inevitable double counting of the carbon emission in their supply chain. Data from different vendors on the same companies differ, in some cases by a factor of 20.

The picture is further clouded by the uncertainty around carbon pricing. Transition towards a low-carbon future will require fossil fuel prices to rise substantially, if the targets set by the Paris Agreement are to be met.

Currently, prices are moving at a snail’s pace, leaving investors wondering whether draconian rises will be inevitable and, if so, when. With its many moving parts, climate change remains an inexact science for investors.

I have illustrated the resulting challenges via a case study in my article in today’s FTfm (24th February 2020), which you can access if you have a subscription. It shows that, given the severity of climate risks, institutional investors believe they can’t afford to wait for the data to become more reliable. Some are rapidly building credible in-house capabilities that could give them an information edge; others are intensifying pressure on data vendors for step improvements.

These collective efforts will ensure that data issues will be in the rear-view mirror before long.

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