Last week Amy Domini, founder of pioneering ESG (Environmental, Social, Governance) fund Domini Impact Investments LLC, told Bloomberg News that climate, not elections, would have the biggest impact on the stock markets over the next few years.
The evidence supports her.
Sure, Covid-19 is hogging headlines as the disaster du jour, but on the climate front, 2020 is shaping up to be the year that Gaia struck back.
The year started with huge swathes of Australia getting tossed on the barbie in unprecedented wildfires, which were eventually quelled in part by torrential rains and flooding. Not be outdone by the junior continent, areas of Siberia basking in a newly subtropical climate burned through former permafrost , releasing huge amounts of carbon to further exacerbate global warming.
In the American West, California, Oregon, Washington, and Colorado are having apocalyptic fire seasons, all attributable at least in part to warming from human greenhouse gas emissions. Down south, warm waters in the Atlantic contributed to an unprecedented – yeah, you’re hearing that word a lot – hurricane season, with so many named storms that we’re stuck with calling them by Greek letters instead of kicky media-friendly names.
So humanity is careening down a Gadarene path to self-extermination, with climate change the primary driver, and other potent disasters like ocean acidification, plastic pollution, and unchecked deforestation looming behind.
What’s missing is the absence of boardroom conversations about these very real existential threats. While most large companies have some form of Corporate and Social Responsibility reporting, addressing environmental, social and governance (ESG) issues is often not so much a priority as a an inconvenience foisted on them by regulators, media, and an increasingly uneasy public.
The corporate world has more power today than at any time in human history, with mega-corporations and their shareholders commanding more resources and influence than most nation-states. This isn’t necessarily a bad thing or a good thing; but it’s a thing.
And yet the big picture conversations are rarely happening. Leaders divert their gaze from the elephant in the room, or suggest that it’s a coffee mug or a potted plant, when it’s just smashed the video conference gear and is standing on the table trumpeting.
If we’re going to secure a habitable planet in which to live and do business, climate and ESG concerns must become a fundamental element of corporate strategy.
Some companies are starting to take a more active approach to the issues, for example, examining the vulnerability of their supply chain to accelerating weather disasters.
But paying attention to the issues must go beyond pragmatic self-interest and PR lip service. This has begun, as auto companies pledge greener vehicles and carbon reduction, and manufacturers and retailers adopt renewable energy to run their operations. And 55 financial institutions, including heavy hitters like HSBC and BNP Paribas recently agreedto set climate goals for certain assets in their loan portfolios. All helpful, but far too slow and too vague to ward off probable disaster.
It’s up to investors to demand change, and for regulators to enforce it. Now.
A recent survey found that 70% of Institutional investors think that ESG analysis – of which climate is a key subset – will be standard for portfolios in the next five years, and 78% have invested in sustainable infrastructure projects. And more retail investors are starting to look for sustainable investments, although options are still relatively limited.
The next step is accountability. Regulators making ESG reporting a fiduciary responsibility makes sense, particularly when studies have found that firms with high ESG scores can reduce risk and deliver better returns.
That’s not to say it will be easy. Most companies still aren’t set up to gather and report detailed ESG data, making measurements potentially inconsistent and unreliable. Even the basic idea of what metrics should be reported will diverge widely among stakeholders.
But from an ROI point of view, it’s a no-brainer. For some relatively meagre up-front investment, businesses improve performance, investors make better decisions, and the human race continues not to be extinct.