At Cornerstone Capital, we have articulated the overarching effects of climate change on the economy, and the need for better analysis of the mechanisms at play that affect markets and investment decisions. While a tentative consensus is emerging among market players on these issues, the actual level of “carbon literacy”, or the understanding of how CO2 emissions are intertwined in the economy, is relatively low. There is a need for tools to address this gap in the market, and many organizations are already providing them. But for true investor insight, we believe a more collaborative approach is needed.
Why is carbon literacy important? Most environmental reporting managers and climate change specialists understand the basic mechanisms of climate change and greenhouse gas emissions, and the existing ways to measure emissions and to estimate the carbon embedded within the economy. But savvy market players are another story. Anyone who intends to make decisions that fully integrate the challenges and risks of climate change should possess at least a basic knowledge in this area, in the same way they possess some level of financial literacy.
Climate change combines research and analysis from many fields, including oceanography, atmospheric analysis, astrophysics, economics, demography, etc. The Intergovernmental Panel on Climate Change (IPCC) publishes extremely dense research findings within publicly available reports, although the general public or corporate people with limited time may find these reports overly complex and inaccessible.
Closer to markets, organizations such as Ceres have produced toolkits for corporate leaders to better grasp the effects of climate change on their business. The IIGCC (Institutional Investors Group on Climate Change), together with the United Nations Environment Programme Finance Initiative and Cambridge University, have synthesized the findings of the IPCC report that are most relevant for investors and the financial sector. Another example of joint collaboration is the Global Canopy Initiative which published the Little Climate Finance Book, gathering knowledge and analysis related to the specific topic of climate finance.
Carbon literacy has also been the focus of local authorities. In Manchester, the United Kingdom, the City Council is financing a project aimed at providing carbon literacy training for everyone living, studying or working within the city’s limits.
Reporting on greenhouse gas emissions has increased substantially over the past twenty years. The Carbon Disclosure Project (CDP), founded in 2000, has become a central repository of corporate carbon reporting, and received in 2013 data from more than 4,500 companies. The CDP works with companies and investors to enhance knowledge not only of global climate change risks and opportunities, but also of related environmental issues such as water scarcity and deforestation.
A Broader Set of Tools
But how would investors or corporate managers, on a large scale, develop a level of carbon literacy comparable to their level of financial literacy, without delving into complex science or technical reporting requirements? Beyond the existing products, we could imagine the potential for broader collaboration on a mainstream project or set of learning tools that would be the equivalent of an advanced course in climate change and CO2 emissions.
Such a compendium would be regularly updated with the latest scientifically shared understanding of the effects of climate change, basic numbers and facts on greenhouse gas emissions, estimates on how carbon is emitted in industrial processes or embedded in market products and services, and how it can be reduced, mitigated or offset. Carbon jargon/vocabulary, the main players, sources of information and works in progress would also be useful knowledge for most investors and corporates. Collectively, these datasets would help increase investor appreciation of the risks and opportunities of climate change on their products and services, supplier chains, and also better evaluate the total impacts of existing and expected regulations. It might, most of all, contribute to the rising consensus on the importance of climate change that we currently observe.
Today, nearly all this knowledge exists, but is not tailored to the market of general “climate aware” individuals who still do not understand the mechanisms and rules at play. If we are to successfully decarbonize the economy, we all need to possess this basic knowledge. Capitalizing on existing tools, or developing ad hoc products to increase carbon literacy within companies, can certainly help in gaining relevant know-how, and maybe a competitive advantage.
As we have asserted in this Journal, “economic models that do not integrate the full potential impacts of climate change may become increasingly unrealistic”. Therefore, addressing carbon literacy throughout the economy is a necessary step. In this short article we have cited a few examples of existing products, but there are many others, developed by academia, corporations and international organizations that can contribute to building and enhancing this common knowledge challenge. We therefore encourage market players to consider investing in carbon literacy as a way to gain a better understanding of what will shape the markets of tomorrow – and to ensure that their investments will have a better chance of enduring the deep changes coming to our economic system.