Companies and investors who turn a blind eye to climate change no longer have any alibi. Thanks to international bodies and specialist firms such as Morningstar, the tools and resources needed to act — right now — are multiplying.
For years, a phrase has echoed like a mantra in financial circles: climate change threatens not only the health of our planet, but also the profits of companies and investors. To give just one example, anyone pocketing dividends from coal giants must resign themselves to the fact that, year after year, this energy source will be pushed ever further to the margins and will therefore become less and less of a sound investment. And preventing this kind of damage is decidedly wiser and more cost-effective than sitting on one's hands and then trying to make amends when it is already too late. Until fairly recently, however, this line of reasoning inevitably sounded abstract. Now, that is no longer the case. Reports, studies, ratings and guidelines exist that are capable of identifying those companies and funds still too dependent on an economic model that has run its course, pointing them — step by step — in the right direction for change, in response to the challenges of the present. The latest signals come from two highly respected names: Morningstar and the Task Force on Climate Related Financial Disclosures (Tcfd).
It is now universally acknowledged: climate change represents a genuine financial risk. But how are investors to understand whether their portfolio is heavily exposed to these risks, or whether, on the contrary, it is aligned with a low-carbon future? The answer comes from Morningstar. The firm, one of the most renowned in the world in the field of independent financial research, launched a dedicated indicator at the beginning of May, known as the Morningstar® Portfolio Carbon Risk Score. This score, based on assessments by specialist firm Sustainalytics, will initially be applied to around 30,000 funds. For now, European funds are proving better prepared, unlike those in Asian and emerging markets, which are lagging considerably behind. The United States, meanwhile, sits roughly in the middle of the rankings.
And there is more: the firm will award a kind of "quality seal" (called the Morningstar® Low Carbon Designation™) to the most virtuous portfolios — those that achieve a low carbon risk score and are not particularly tied to fossil fuels, because the companies within them are gearing up to meet the commitments made under the Paris Agreement.
Since funds invest in company securities, this means that — tracing back to the source — it is companies that must precisely identify the risks linked to climate change and then set them down in black and white. This is both out of responsibility towards investors, and in order to be able to equip themselves accordingly.
A great deal of help in this regard has come from the Task Force on Climate Related Financial Disclosures (Tcfd), established by the G20's Financial Stability Board and chaired by Michael Bloomberg. After months and months of work, the final report containing all the (voluntary) guidelines to be followed was published in the summer of 2017. Now comes another important step forward: a web portal, called the TCFD Knowledge Hub, which makes available all the tools needed to translate these recommendations into day-to-day work.
We are talking about more than 300 resources — including regulatory references, videos, reports, courses and so on — published by international bodies, trade associations, universities, consultants and other companies. Anyone can select those they find most useful, based on the sector in which they operate or the area on which they wish to focus. The site is managed by the international consortium Climate Disclosure Standards Board. According to Business Green, approximately 275 companies, and 47 organisations of other kinds, have to date signed up to the Task Force's guidelines. The hope is that this audience will grow, precisely because this task is becoming ever simpler to carry out.
