Kentaro Kawamori on how investors and shareholders are pressuring companies to take climate action
Ahead of the Sustainable Investment Forum North America, Kentaro Kawamori from Persefoni talks to Climate Action about how both investors and shareholders are pressuring companies to take climate action, mitigate their carbon footprints whilst putting ESG at the forefront. For companies to make informed decisions about climate risks and opportunities they need access to accurate, real time information for future forecasts.
Ahead of the Sustainable Investment Forum North America, Kentaro Kawamori from Persefoni talks to Climate Action about how both investors and shareholders are pressuring companies to take climate action, mitigate their carbon footprints whilst putting ESG at the forefront. For companies to make informed decisions about climate risks and opportunities they need access to accurate, real time information for future forecasts.
How is climate risk a financial risk?
As the U.S. Securities and Exchange Commission’s Acting Chair, Allison Herren Lee recently shared in the ESG Enforcement Task Force announcement, “Climate risks and sustainability are critical issues for the investing public and our capital markets.” Evidence of this statement grows increasingly clear when we see global banks accounting for and embedding climate change risks in their business strategies with a significant increase in disclosures about climate change. It’s clear that banks are starting to see climate risk as a business-as-usual risk. A recent KPMG survey reveals that 72 percent of the banks they interviewed say that climate change is a financial risk and will impact their business in the longer term with 68 percent considering climate change a material or principal risk.
More and more the financial sector understands that responding to climate change will affect their business in its entirety, with decisions on which clients to lend to in the future, assessing which businesses to support through investments, being one manifestation of this. A business strategy that addresses climate risk will have real impacts. And although more and more companies are reporting on climate-related risks and opportunities, only 3% of companies are actually reporting quality that correlates directly to climate risk, indicating there is clear room for improvement.
Why is carbon a data problem?
When it comes to climate change – arguably one of the most important issues facing our world – we have very poor data. The latest IPCC report made it abundantly clear that we would face dire impacts should our fight against climate change take a “business as usual” approach. And although scientists have been raising the red flag on climate change for decades now, we remain woeful at collecting, measuring, and thus most importantly, managing, our carbon impact. More than 90% of the S&P 500 publish sustainability reports that help document company actions, communicate with stakeholders, and build the brand for customers and employees, but they are not the right tool for ‘investor grade’ information. These sustainability reports do not provide sufficient data sets to truly manage a company’s climate impact.
Corporate leaders cannot make informed decisions about climate risk and opportunities with annualized data that is months if not years old. Companies need accurate, real-time information that can be forecasted into the future. With this calibre of data, they will find cost savings and new business opportunities that will not only advance sustainability, but also corporate fortunes. Large asset owners and managers increasingly express a need to better understand their “financed emissions” – that is, the climate impact of their investments – so that they can use their market power to mitigate climate risks and make more sustainable investment decisions. They simply can’t do that without good data.
What opportunities does the financial sector have to address climate change?
Banks, asset managers, and asset owners typically emit very little direct greenhouse gas (GHG) from their own operations. By far, their biggest climate impact – and opportunity to improve – is through their lending and investing activities. A recent report from the climate non-profit CDP revealed that GHGs emissions associated with financial institutions investing, lending, and underwriting activities are more than 700 times higher than the emissions from their own operations. By understanding the climate impact of its investments, or “financed emissions,” the finance industry has the opportunity to align its capital to sustainable business practices and re-examine their lending to facilitate a transition to a low carbon economy. In the same way we have adopted accounting standards and rigor in our financial reporting like Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS), we must adopt the same rigor in our carbon accounting using reporting standards like Task Force on Climate-Related Financial Disclosures (TCFD), Sustainability Accounting Standards Board (SASB) and others.
In fact, my company, Persefoni, was the first to incorporate the new financed emissions standards developed by Partnership for Carbon Accounting Financials (PCAF) into our carbon accounting platform. It enables banks, asset managers, and asset owners to understand the carbon impacts of their lending activities using globally accepted practices. Financial services firms make millions of transactions per year involving a myriad of companies and industrial sectors. Without state-of-the art information technology encoding the PCAF standard, it’s impossible to account for the carbon impacts of these transactions. PCAF helps unlock this potential and allows the global financial system to divert capital flows to support the $6.9 trillion of infrastructure investment needed to transition to the low carbon economy.
How is investor demand driving ESG momentum?
Investors and shareholders alike are putting pressure on companies to take climate action, mitigate their carbon footprints, and redefine their business strategies with ESG principles at the forefront. Larry Fink, CEO of the $8 trillion asset manager BlackRock – has warned companies to provide better climate data or face a vote against management. This past May, BlackRock made good on this threat by propelling three climate activists onto the Board of ExxonMobil.
On the reporting side, the International Financial Reporting Standards (IFRS) – whose standards are mandated for financial disclosure in most countries in the world – is now taking on sustainability standards and focusing on climate change first. The mounting pressure from investors and shareholders as well as from the regulatory side is driving the business community to take a meaningful stand against climate change. Today, one-third of Fortune 500 companies have published “net-zero” climate goals and the Glasgow Financial Alliance for Net Zero (GFANZ) boasts $88 Trillion of combined assets under management.
Kentaro Kawamori is speaking at the Sustainable Investment Forum North America during Climate Week NYC from September 21, you can join him by registering here today.
