Giving Compass’ Take:
• Authors at Brookings argue that while most financial concerns about global warming involve fossil fuels, there are other reasons why investors should be worried about climate change.
• How can we draw attention to the physical risks of climate change for investors?
We assess how rising concerns about climate change affect disclosures to financial markets.
Today, 60 percent of publicly traded firms reveal at least something about climate change. The largest volumes of information concern risks due to possible transition away from fossil fuels. By contrast, there is much less disclosure around the physical risks of climate change, such as sea-level rise (see chart).
In municipal finance, disclosure of physical risks is even weaker, although many municipalities are exposed to flood, fire, heat stress, and other perils that could destroy infrastructure and undermine the tax and income bases essential to repayment of long duration bonds.
Although policy makers and investor ESG frameworks have focused klieg lights on the financial risks that might accompany policy-driven transitions away from fossil fuels, the real mispriced risks lie with the raw physical risks of a changing climate.
We make two central arguments:
- The quality of disclosure is highly uneven and generally lousy.
- New analytical tools, regulatory incentives, and business practices can lower the cost and raise utility of meaningful disclosure, particularly if accompanied by stronger regulatory rules and industry norms. New practices at credit ratings agencies and rethinking of liability rules could accelerate best practices.
Incentives must be better aligned to promote forthright disclosure, particularly via practices at FEMA and flood insurance providers.
Activists and analysts are fighting the wrong fight. The extraordinary attention to transition risk aligns with most mental models of how financial assets might be affected by climate policy, but the real push for better disclosure should be on physical risks.
Read the full article about why investors should be worried about climate change at Brookings.
If you are looking for more articles and resources for Climate, take a look at these Giving Compass selections related to impact giving and Climate.
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