Large-scale divestment, a call for an in-depth analysis of the business model, as well as a greater transparency in reporting – actions addressing climate risks have become a new component of a fiduciary duty for global investors. When will this trend reach Poland?
In January 2018, Mayor of New York Bill De Blasio announced a lawsuit against mining companies as their activity contributes to climate change. At the same time, the city has decided to sell the assets valued at 5 billion dollars that it has already invested through the municipal pension fund (USD 189 billion) in mining and energy companies. This is another of a series of disinvestments undertaken by global investors. The most spectacular one was announced in December by Norges Bank Investment Management (NBIM), the largest public pension fund that manages the USD 1 trillion budget, which decided to sell all assets in these sectors. The planned divestment is estimated at USD 35 billion and the announcement itself has caused fluctuations in the global market.
These spectacular divestments are in fact an attempt to draw attention to the impact that climate change could have on global economy and global security. Extreme weather phenomena, associated with increased temperatures on Earth, such as floods, hurricanes and droughts – pose a threat for global security, as well as the operational activity of many international companies and the entire global economy.
According to estimates of the SwissRE insurance company, the difference between insured and total losses increases every year. In the last 10 years, only about 30% of losses incurred as a result of disasters have been covered by insurance. This means that 70% of the losses caused by violent weather events, valued at a gigantic sum of $1.3 trillion, were actually suffered by individuals, companies and governments.
The Intergovernmental Panel on Climate Change (IPCC), a research body that brings together climatologists from around the world, warns about further consequences of global warming. According to current scenarios, the reduction of water resources resulting from global warming can lead to a displacement of 24 to 700 million people in the world, and raising the Earth’s temperature “only” by 3°C above the pre-industrial levels will cause sinking of coastal cities that are inhabited by 275 million people.
The only chance to reduce dramatic effects of climate change is to keep the temperature rise on Earth below the dangerous limit of 2°C, in accordance with the Paris Agreement adopted in 2015. The global carbon budget, which describes the total amount of carbon dioxide that could be released to the atmosphere, serves as a tool to verify the scale of global efforts and chances of achieving the goal. So far, as a global community, we have already consumed 74% of this budget, and according to the calculations of scientists, we should achieve net-zero CO2 emissions within the next half of century.
In light of current knowledge regarding the climate risks in financial market, coalitions of investors as well as CEOs of the largest funds such as BlackRock or Vanguard, call for better understanding and improved transparency in reporting climate risks, which could be divided into:
– material risks, i.e. threats to operating activities and supply chains resulting directly from extreme weather phenomena,
– regulatory risks, related to global efforts to limit the global increase in temperatures (e.g. carbon tax),
– legal risks referring to the concept of environmental harm and attempts to obtain compensation by entities such as New York or private individuals,
– technological risks that create opportunities for the development of new markets and sectors, at the same time posing a threat to existing business models,
– reputational risks related to the preferences of increasingly conscious consumers. In February 2018 the British insurer Aviva had to face them, as a consequence of the information revealed by the media that, in spite of the adopted low-emission strategy, in 2017 the company increased its investment portfolio in the coal-based energy sector in Poland (currently, the exposure reaches GBP 372 million).
Entities from the financial market that are calling companies to implement reporting as a legal requirement, indicate that inclusion of climate risks is a fiduciary duty to people whose property they manage.
The High-Level Expert Group on Sustainable Finance (HLEG) set up by the European Commission has a similar stand on the issue. In the report published in February 2018 that summarizes HLEG’s activities, which were undertaken over the last two years, it is argued, among other things, that unambiguous inclusion of environmental, social and governance factors (ESG factors) into investment models is a fiduciary duty (duty of loyalty and prudence) of institutional investors and other asset management companies. Experts also point to the need of harmonization of European law in this area. As a consequence of the presented proposals, the European Commission has started work on the analysis of the impact of the above-described recommendation on the European financial market.
What do the stricter climate risk policies implemented by investors and legislators mean for the Polish energy and financial sectors? This issue is currently being investigated by experts at WiseEuropa, who focus on the analysis of the risks for the Polish financial sector that could result from its further engagement in large-scale investments in coal-based energy sector. The results of the research will be presented in the report, which release is scheduled for June 2018.