In Essays, Innovation

Only 5% of the UK’s corporate pension funds have a policy to protect against the potential impacts of climate change on their returns, according to an article in the Financial Times.

I worry this problem is greater than it might first appear, as I see four risks, not just one:

First, there’s operational risk, as the companies in which they invest could see activities made more difficult or costly by changes in the environment. Severe weather can disrupt transportation, so consumer services and supply chains are at risk, and anything that grows is all but held hostage to it. Temperature can affect everything from the speed and lifetime of industrial motors, to employees’s ability (or willingness) to work near them.

Second, there’s regulatory risk, since it’s highly likely that many industries will find performance changes mandated by governments. Limits on carbon emissions is the obvious example, but there are many others, ranging from water and electricity usage, to the very availability of certain raw resources. Towns, cities, states, countries, and entire trading blocks are getting involved, and each to a different degree…the resulting complexity of compliance representing yet another risk.

Third, there’s legal risk; just consider the New York Attorney General’s recently filed lawsuit against ExxonMobil, asserting that the company knew of its role in damaging the environment, and thereby misled investors as to the long-term value of its assets. Imagine something similar happening to other companies with business models premised on the extraction or release of harmful gases and materials. Who’s to say what they should have known or done, or when? Such is a textbook definition of risk.

Fourth, there’s cultural risk…evidenced by growing proof that consumers are buying products from companies that they think are on the “right” side of the faux climate change debate we have here in the US. It gets unfashionable to buy huge SUVs every time there’s a spike in gas prices, and then a rush to buy them when the price goes down. But what if that cycle is broken, and those large vehicles (on which the US car makers have staked their futures, their limited forays into electric vehicles notwithstanding) become permanently uncool? Again, that possibility represents risk.

This stuff isn’t rocket science, so it’s somewhat surprising that many of the execs trusted with fund oversight were quoted in the article giving excuses that amounted to saying they “were uncertain what action they should be taking,” citing the lack of a standardized approach.

Seems like the companies that came up with their own meaningful methodologies might see better and more resilient valuations, standardization be damned.

Maybe those 5% of companies are onto something?

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