University Essentials: From Crisis to Resilience – Navigating Sustainable Recovery

The UN's Intergovernmental Panel on Climate Change (IPCC) recently issued the first of several forthcoming reports on the latest science on climate change. The report effectively signaled a code red for humanity. It told corporations and governments in no uncertain terms, act with urgency to lower emissions and adapt to the impacts of climate change at a more rapid pace and on a bigger scale.

Moreover, for the first time, scientists said the world has already reached a tipping point for when things like climate change, like sea-level rise and warming oceans, will continue for hundreds to thousands of years before they start to reverse and recent flooding from extreme weather events and unusually hot summer in places like the Pacific Northwest as well as massive wildfires in the West last year. These are stark reminders of how climate change is already impacting our lives. But not all hope is lost and that's what we're here to dive deeper into – the current challenges, impacts and what’s next for organizations in the public and private sphere. It’s notable that IPCC scientists noted that we can still mitigate the worst impact.

Question: Following a “code red for humanity” from the IPCC report- what is the most impactful action that corporations, governments and investors take?

James Salo: As a baseline, almost 2/3 of major global companies that make up the S&P 1200 have carbon reduction targets. So interesting about that polling result that we just had.

And even more than that, disclosed greenhouse gas emissions associated with their operations and purchased electricity. Now on the other hand, our research shows that 72% of the same global companies in the S&P 1200 is on track for 3 degrees warming scenario, just 7% of the emissions that are reductions that are made by 2025 to achieve the goals of the Paris alignment.

We've also identified that major companies face up to $283 billion in carbon pricing costs by 2025 or 13% of their earnings at risk under a high carbon price scenario. And 2/3 of the S&P 1200 have assets that may face moderate climate risk by 2050 and 2/3 have at least 1 asset with high risk -- a physical risk on our high-impact climate change scenario with greatest risk coming from things like water stress and wildfires from -- that are linked to global increasing temperatures.

And sure, there's a lot of risk to business coming from transition and physical risks associated with climate change. Now with regards to COVID-19 and the recovery efforts and how they can move us towards a more sustainable future, it depends on how effective we are as a global society at -- towards moving towards a new normal.

Certainly, governments can have a lot of power here and can move us to enact stimulus packages that support climate goals. But there are also ways that businesses and others can have effect. Our research has found that a 7% reduction in freight shipments in the shipping sector or a 40% reduction in business travel in aviation sector could help align those 2 industries to a 2-degree climate scenario and also just moving to a 3-day work-from-home policy in the professional services sector would align emissions impact from passenger transport over the next 5 years. So with the right government support for climate-aligned stimulus and some adjustments in business to a new normal, we may be able to line some solid building blocks to move us towards a more sustainable future.

In the U.S., billions have been allocated to “green investments”, what is the likely impact?

Over the last decade, there has been a huge growth in ESG and sustainable investment. The U.S. SIF Foundations 2020 biannual report says that there are now sustainable investing assets of over $17 trillion or 33% of total U.S. assets under professional money management. That's a 42% jump from 2018. Another way of looking at it is on the UN Bank Principles for Responsible Investments.

As of September 2020, the PRI had over 3,000 signatories with $103 trillion in assets under management. That's up from 63 signatories and $6 trillion in assets under management in 2006. Now what are some of the reasons for that change? Growth of visibility of ESG issues, for one. Certainly, research from Morgan Stanley shows that 85% of individual U.S. investors now express some interest in sustainable investing while half have involvement in sustainable investing. Another reason towards that transition is the investment power and transfer of this power to younger generations.

Nearly 95% of millennials are interested in sustainable investing. 75% of those believe that sustainable investment decisions can impact climate change policy. So the growth of ESG investing is likely to continue as there's that continued transfer of wealth. Also, the information available on ESG is -- the depth and breadth is expanding, and the materiality of that information is becoming more widely recognized.

As an example, using climate change, as of October 2020, there were more than 1,500 organizations that had expressed support for the Task Force for Climate-Related Financial Disclosures, TCFDs. That was an increase of 85% only from a few months earlier and nearly 60% of the 100 largest public companies support the TCFDs or report in line with some of the recommendations. The global pandemic has also put a spotlight on this with the value of ESG being considered more in capital markets.

There's been evidence that shows that there's been greater resilience to market shocks in ESG investments. And there's been outperformance from mainstream indices and relative to ESG investments during that time. And there's been significant inflows in those investments. So a number of things are kind of driving this that there has been a large increase in those investments.

Question: What steps can organizations take to ensure they are measuring what matters in ESG to effectively monitor change?

There is a huge amount going on right now, the ESG disclosure rules front. As you have reported in the U.S., the SEC has posed to roll out ESG disclosure regulations of companies for areas like climate risk and human capital management. And the SEC is also considering increasing the transparency rules around fund managers and how much they must provide in their investment products that are being touted as ESG-focused or green-focused, et cetera.

So there's change coming here in the U.S. Also in the EU, as mentioned on this call even earlier, there's a lot happening trying to make ESG investment more transparent to improve corporate ESG disclosure.

These are cornerstones of the EU Sustainable Finance Action Plan, which includes the green taxonomy, the Sustainable Finance Disclosure Regulation, SFDR; and the Corporate Sustainability Reporting Directive, CSRD. All of those are looking to drive greater ESG disclosure and standardize it in certain ways.

The CSRD will cover nearly 50,000 businesses and companies reporting into it are going to have to report on what their business is -- how their business are affecting the environment, their employees and customers, and they're also going to have to disclose what percentage of their revenue is aligned with the green taxonomy.

Under SFDR, asset managers, fund -- pension funds and insurance companies are going to need to disclose whether -- how they consider ESG risks in their investment decisions to help prevent greenwashing through more disclosures and information. They'll also need to highlight specifically where their ESG risks lie in their investments. Turning a little bit towards more looking at what the future is and what ESG measures are going to really define the next decade, we've talked about green investment, and there's been a significant growth in ESG investments, as we highlighted earlier. And corporate green bond issuances have been growing sharply in the last 5 years. That being said, just focusing on climate change, estimates from the IEA and the IPCC are that trillions of dollars of investment are needed annually just to transition to an energy system that will keep temperature rise below 1.5 degrees from pre-industrial levels. So I'll be watching how much is going into climate investments quite closely.

The other ESG measure I wanted to highlight as for defining the coming decade is the value of nature and biodiversity. Just as climate nature-related risks are coming more in focus and their importance is becoming more understood, recent research from the World Economic Forum that analyzed 163 different industrial sectors and their supply chains found that over half of the world's GDP is moderately or highly dependent on nature and its services. And the recently launched Task Force on Nature-related Financial Disclosures, TNFD, has been established to create a framework for corporates and financial institutions to assess, manage and report their dependencies on and impacts on the environment. And they've committed to releasing a framework by 2023 for organizations to report on and act towards these evolving nature-related risks.

So lots of standards both from kind of the government side of things and also from the rest of kind of civil society.