Jumping the Gun on Climate Asset Risk Disclosure?

sinking oil rigOne of the primary focus areas of this site is to push for greater transparency in the market around climate risk to the private sector (here and here). I mentioned in a previous post that the oil and gas sector alone could potentially see $2.2 trillion of stranded fossil fuel assets, with the United States potentially seeing the greatest loss. It is vital for the sustainability of the private sector and our global economy that shareholders and stakeholders are aware of what potential risk that may be faced by companies. The practice of disclosure will benefit both the company and its shareholders. It will force companies to take a hard look at their operations and risk management strategies and assess what actions may need to be taken to mitigate this risk. It will help current and future shareholders to better understand the risk they face when investing in a company.

For the last 15 years, the Climate Disclosure Project (CDP) has been working to get companies, as well as the public sector, to voluntarily disclose their greenhouse gas emissions and carbon related activities. The belief is that disclosure of this information by both the private and public sector will result in more effective management of carbon, as well as better management of climate risk. In their most recent report,  CDP was able to have over 1,000 companies disclose their climate data, out of a pool of 1,839. Not a bad number for a voluntary disclosure program. Of those reporting, the highest percentage of reporting came from the IT and healthcare industry, while, not surprisingly, the lowest percentage came from the energy and utility sector, 40% and 38%, respectively.

However, although we are seeing a lesser percentage of the energy sector participating in the 2016 CDP report, we may be seeing a growing number in the next few years. In the last couple of years we have seen a growing trend in the number of carbon asset risk resolutions that are being presented to company boards. According to the CERES Shareholder Resolution Database, 75 resolutions were brought before shareholders. The majority of these resolutions for carbon asset risk disclosure are power companies and oil and gas companies. There were also a smattering of banks, a real estate company and some mining companies. The mining companies appear to have the most success in getting these resolutions passed. They went three for three in the resolutions proposed and passed. These mining companies include Rio Tinto, Anglo American and Glencore Plc.  Although we saw over 40 oil and gas companies with resolutions proposed, only 10% of them passed. This includes ExxonMobil and Occidental Petroleum, on their second try in two years, as well as Suncor in 2016, BP in 2015 and Royal Dutch Shell in 2015. Chevron and Anadarko withdrew their resolutions in 2017. However in 2016, they were pretty close with more than 40% of shareholders voting for carbon risk disclosure.

In any case, what we are looking for are small wins and I think we saw some this year. Further, it is likely that we will continue to see more disclosure resolution activity as the SEC further defines its materiality requirement in its Guidance Regarding Disclosure Related to Climate Change. Under this guidance, the SEC only requires disclosure of climate risk if there appears to be a material risk to the company. There is still some interpretation as to what is “material” related climate risk to a company. That is why we see the ongoing push back by much of the energy sector on disclosing these risks. They argue there is still significant climate, consumer and regulatory related uncertainty that makes this risk difficult to quantify at this time. It is anticipated that this argument may lose some of its strength as we continue to refine our global climate models and the downscaling of these models.

A group that is out front that is trying to better define climate risk and promote the disclosure of this risk is the Task Force on Climate-related Financial Disclosures.  They are actively developing resources, guides and scenario tools to help companies better determine their risks and report on them. At the end of 2016 they came out with their recommendations for how companies should prepare and provide climate risk-related financial disclosures. The focus is on helping the business community, lenders/investors and regulators through the development of a framework that makes providing, understanding and using this data a bit easier.

There is some argument that at this time the Task Force has gone a bit too far. The IHS Markit organization has just come out with its own report that pushes back on the TCFD recommendations arguing that although it is a good framework that is useful for assessing climate risks, it is difficult to tie these climate risk indicators to actual financial impacts. They argue there is still too much uncertainty on the scale and timing of these climate risk factors and financial decisions by investors could be skewed by these indicators.

My take on this, is that it is good to have a healthy dialogue between these groups. There is still some uncertainty on the scale and timing of climate events, regulations and changes in customer preferences. It is possible that investors may take this climate risk disclosure information and potentially jump the gun and divest when it would be fine for them to stay invested for the near to mid-term. So, we need to continue to refine our frameworks, models and scenario tools to ensure we have the best information available. However, we don’t need to wait until it is perfect with 100% certainty. sinking oil rig

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