How should investors respond to the challenges of climate change? On our June 12th conference call, Cornerstone Capital CEO Erika Karp and John Wilson, Head of Corporate Governance, Engagement and Research, provided investors and corporate constituents with our perspective on this pivotal issue.
The Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) from the UN highlights the uncertainties embedded in the coming disruptions to the global climate. The environmental disruptions associated with an increase in global temperatures greater than 2 degrees may be beyond the capabilities of the global economy to adapt.
We believe investors must adapt to the evolving reality of climate change with transparency, engagement and pragmatism. To prevent multiple crises, a global reduction in greenhouse gases of 40-70% is required in the next 30 years. While this may seem ambitious, the IPCC estimates that the cost of doing so would be a minimal 6 basis points (0.06%) of global output per year, not counting the benefits of preserving a stable climate. A sufficiently sharp reduction in global emissions would require a transformation in the global use of energy away from fossil fuels, stranding many of the assets of fossil fuel companies. Proponents of divestment claim that, for this reason, shares of fossil fuel companies are overvalued and should be sold by investors.
This analysis may be too simplistic, but may not be easy to dismiss. Cornerstone Capital Group believes that climate change needs to be better incorporated into investment management analysis. We recommend three actions that investors should be taking now:
- Engage with companies to improve the quality of strategic information about stranded assets available to investors and companies;
- Integrate future climate risk into investment models, rather than relying solely on historical measures of volatility. At a minimum, investors should consider a company’s climate strategy to be a sign of the quality of management.
- Participate in the development of global disclosure standards to ensure that available information is comparable across companies and of high quality.
Listen to the full call to learn more about the three most important statistics investors should consider, and the actions to take, in considering climate change.