Climate risk has dominated the spotlight more recently with many of today’s investor activists viewing climate change as existential for companies. Climate risk is increasingly becoming part of the mainstream investment lexicon, no longer relegated to only the socially responsible investors. The conversation is spreading to companies and their investor relations teams, which hadn’t previously engaged much on the “E” in ESG matters. With real money, real risks and real opportunities at stake — not to mention governments around the world seeking to accelerate climate action — disclosing climate risks will soon become mandatory for publicly traded firms. Such is the fervour around disclosure that we had the US lawmakers introduce the Climate Risk Disclosure Act of 2019 last week. The bill directs the Securities and Exchange Commission (SEC) to issue a rule requiring public companies to report information relating to their climate risk exposure.
Over the next five years, we could see environmental change looming as a spectre over the bottom line of companies as climate variability and weather extremes have the power to disrupt supply chains and hurt physical investments. More recently, a Japanese manufacturer said that increased rainfall and flooding in Southeast Asia had the potential to knock out its suppliers. A large Brazilian bank said increasingly severe droughts in the region might hurt the ability of their borrowers to repay loans. A large US tech firm also noted that rising temperatures could increase the cost of cooling its energy-hungry data centers. Other companies while far removed from these environmental impacts will feel the impacts as shortages and costs ripple through the global supply chain.
While ESG disclosures in the past had been condemned to an auxiliary status, too boilerplate for investors to make any meaningful deductions, investors now understand that sustainability challenges pose material financial risks; an understanding of which needs to be embedded into all capital market decisions. Companies that provide environment disclosures are more likely to set relevant goals and have systems in place making them in turn more resilient in the face of climate change. Companies can no longer ignore the seriousness of identifying, analyzing and reporting material environmental exposure as it becomes increasingly intertwined with financial risks.
GSAM is committed to helping our clients deploy their capital in a manner that prudently integrates environmental, social, and governance (ESG) considerations and seeks to have positive impact on environmental and social issues, while helping our clients preserve and grow their financial assets.