Sustainability has become a key concern for investors. Recently a coalition of investors who oversee $9 trillion in assets wrote to over 30 of Europe’s largest companies, including Anglo American, BMW, EDF Energy and Lufthansa. They urged them to include climate-change risks in their financial statements writes Mike Hayes, Global Head of Renewables at KPMG.
The investor group, which included JP Morgan Asset Management, Fidelity International, and M&G Investments, called on the companies to ensure their financial statements reflect the implications of the Paris agreement. They cited concerns that corporate accounts have become disconnected from businesses’ public statements on climate change. Indeed, many groups had set out plans to cut their carbon emissions but had not reflected this position in their financial outlook.
The bottom line is that there is no vaccine for climate change. I compare the climate agenda to World War II which had to be fought on land, sea and in the air. The three big battle grounds for climate change are governments, companies and individuals. Sustainability continues to be very important. People talk about ESG and the social aspect of it has come to the fore and companies ignore that at their peril. From an investment perspective, the big issue is climate and investors are highly exercised about the issue and they will continue to be. A vaccine roll-out is scheduled for COVID-19. However, if you think COVID-19 is bad, in my view it is nothing compared with climate change and not enough people have noticed yet how much the dial has moved in the investor’s mind-set.
At the heart of all of this is climate risk which is two things: physical risk and transition risk. Every company in the world has to start thinking about these things. Physical risk is the one that everyone can understand – the risk of being affected by forest fires or assets being destroyed by typhoons. Transition risk is not at all as well understood. Because of all the different things that start happening because of climate change many consumers will change preferences, they may eat less meat and they may fly less. Regulation is going to come in relation to climate in so many different ways and there will be supply chain pressures which are difficult to understand. Meanwhile many companies are saying it’s not enough for them to be zero carbon in their own operations, their suppliers will have to be as well. Inevitably, employees are also driving action. Whatever business model you have will be impacted. The role of a chief executive or a non-executive director is now also to understand the impact of climate risk. If a company director is not thinking about that - investors will want to know why not.
I am hugely encouraged by the current Government’s approach to climate action. The programme for government contains many of the elements that I have been seeking for years and the challenge now is to follow through on those commitments. We need additional resources to be made available to government departments to deal with the incredible challenges facing them in this area.
Both the public and private sectors are now understanding the implications like never before and we have seen a transformation in Irish business in the last nine months. They are no longer ignoring it. Awareness is one thing, but you need the skills and expertise to do something about it. I’m broadly of the view that Irish business is on the journey including the many public sector organisations who are at the forefront of the change.