An important initiative has been launched by Ceres and Environmental Defense to petition the US Securities and Exchange Commission to require companies to disclose the risks that climate change may pose to their financial results.
Ceres and Environmental Defense are non-profit organisations which attempt to bring together investor groups, environmental organisations and investment funds to engage directly with major companies on sustainability issues. Ceres in particular has a strong record of performance over many years, and was a primary sponsor of the Global Reporting Initiative.
In their petition they are joined by ten states, including California and Florida, and New York City to mandate corporate financial disclosure of climate risk. They note that the risks go beyond the direct risks posed by, for example, extreme weather events, to potential capital investment in new technology as regulations become more demanding of carbon performance. Significantly they are demanding a more precise quantification of climate risk, beyond simply noting that such risks exist, or may exist. In this way, they are bringing climate change from the periphery, as a branding or compliance issue, squarely to the core of the strategy development that drives economic value.
It has been apparent for some time that climate risks are largely unrecognised, unmeasured and unmanaged. It is literally the case that no company is without climate risk. Some industries have obvious exposures: the insurance industry, for example, has for some time recognised and has attempted model the changing risk to its business (see Munich Re, for example). But climate change is affecting all phases of business, including markets, supply chains, raw materials, energy costs and so on.
The simple fact is that very few companies have looked squarely at the increases in risk to their business resulting from climate change. So while the intention of the Ceres petition is to be applauded, the technical challenges it presents are considerable, and have only just begun to be recognised, let alone addressed. (see my 2007 conference Presentations on this topic.)
Recently, for example, a survey by the Australian Industry Group and Sustainability Victoria of 810 Australian manufacturing and construction companies found that only 10% of them new how much greenhouse gas they are producing. Only 7% understood how emissions trading worked. Remarkably only 1% has purchased renewable energy.
This survey conforms with the reality I have found in presenting sustainable business to over 100 companies in the past two years. This lag in corporate knowledge, and corporate action, is difficult to understand, given what is at stake. Not only unrecognised risks, but unrecognised opportunities, are presenting significant challenges to major companies in all sectors in maintaining their industry leadership and competitive advantage. The kind of short-term thinking it represents constitutes a major threat to national prosperity, as much as to global sustainability.
The technical demands of quantifying and financially modelling climate change risk and opportunity should not be underestimated. It requires a multi-disciplinary capability that doesn’t come easy to corporate analysts. New tools must be mastered. But it can be done, and the Ceres/Environmental Defense petition, if acted upon by the SEC (as it will be, sooner or later) will require companies to develop this kind of mastery.
This is precisely the kind of urgency that underpins the development of the University of South Australia’s new Graduate Program in Sustainable Business. The role of universities in contributing to the mounting global campaign to alleviate climate change is to train senior managers capable of using these tools to provide just the kind of strategic evaluation envisaged.
In the end, however, the barrier to adoption is not primarily technical, but cultural. It is the apparent relectance of companies to take climate change seriously, as a major–perhaps the major–factor in the reconfiguration of the the global business environment; to learn about climate change, about the emerging strategies for dealing with it; and to derive the reconfiguration of their businesses that will be required, that is slowing down the corporate response. As is increasingly being noted, those companies that move now will be the leaders in the new sustainability age; those that don’t will not succeed.
Report from The New York Times link here.
Text of the Ceres/Environmental Defense petition link here.