As an investor, comparing the climate commitments of businesses both large and small is not an easy task. Notwithstanding the tremendous advances in sustainability reporting and analytics, two main obstacles remain: a lack of comparability in non-financial methodologies that drive the collection and aggregation of environmental data, and a need for specialized climate science expertise to interpret the findings and draw actionable, investable conclusions.
Using the lens of financial materiality (as guided by established standard setters such as the IFRS Foundation and by climate-related disclosure frameworks such as the TCFD) helps investors gain insights on climate-related risks that can be used to decide which businesses to invest in and how best to mitigate risk. What investors have prioritized so far is understanding how carbon emissions will most likely affect a company’s economic and societal viability.
When I first started exploring ways to marry financial success with environmental sustainability, my approach was met with little interest by practitioners operating in the risk and financial management communities. Public companies often avoided discussing climate-related risks outside of environmental health and safety best practices, and there was a general reluctance to look outside of the business-as-usual mode .
Today, climate change is firmly in the public eye. Financial capital is increasingly being mobilized towards sustainability goals, and job opportunities are growing rapidly as well. However, climate literacy has not necessarily kept pace with the scientific advances or with society’s most urgent socio-economic challenges affecting communities as a result of environmental impacts. Additionally, it remains difficult to make measurable progress toward the climate commitments of individual businesses and define a tangible ambition for creating positive change when country-level roadmaps for implementation are in constant evolution.
I find that a tremendously valuable approach is to first define a series of intentional steps to frame environmental dimensions from the lens of direct and indirect impacts of the business that an investor is assessing. This is how I define it:
Step 1 – Identifying a target impact
Use a financial materiality lens for a preliminary identification of carbon exposures – whether existing or as a result of changes in business strategy.
Step 2 – Mapping direct exposures
Over the past several years, investors’ attention has been drawn to analyzing cumulative exposures by GHG emission intensity at the sector or country level. As carbon risk carries non-traditional financial consequences that are not easily priced before a negative or extreme loss is recorded, it requires prudent management. Moreover, while many large investors are advocating minimizing or avoiding exposure to emission-intensive sectors, that is not a guarantee of moving financial capital to a lower carbon future or delivering on their commitment to decarbonize their investments. At best, it keeps the current situation unchanged.
Step 3 – Promoting opportunities to build out a lower carbon economy
The financial materiality lens is able to shift investor perception of environmental sustainability considerations from risk mitigation to opportunities by following a company’s forward-looking trends. These are reflected in the quality of its management decisions and its environmental performance as compared with its competitors and the needs of customers.
In conclusion, climate commitments remain a major concern for investors as benchmarking company-level goals to actionable barometers of progress is still a challenge. Climate literacy has become more widespread recently but there is still much progress needed to effectively measure and combat climate risks.