In the lead up to the GLOBE Capital leadership summit, CEO Mike Gerbis reflects on the challenges and opportunities for investors in today’s low-carbon economy. For two decades Mike has advised Canadian corporations, institutions and government on how to create long-term value by addressing environmental, social and economic risks and opportunities.
Deputy Governor of the Bank of Canada, Timothy Lane recently said: “Climate change and actions to address it will have material and pervasive effects on Canada’s economy and financial system.” He also stated that our economy is already being affected by more extreme weather events, as well as by “carbon-tax-induced inflation.” A national carbon price and increased carbon risk will also factor into the cost of doing business. Lane projected that the impacts of climate change will cost the Canadian economy $21-43 billion in the next 40 years. The need to take action has become more urgent than ever.
Last month, Ontario public pension manager, OPTrust, released a report on the potential consequences of climate change on its $18 billion portfolio. The report considered a number of scenarios, and included both a “best case” scenario, in which global temperatures were limited to two degrees; and a “worst case” scenario, in which temperatures rise by four degrees by the end of the century.
Under the first scenario, the report found that mining and energy investments would be at risk; while infrastructure, real estate and agriculture investments could benefit. Under the second scenario, the report found a series of potential risks and no benefits. In fact, the report stated that even under the best-case scenario, the average U.S. public pension plan could lose billions of dollars in reduced asset values.
While the U.S. position on climate action may be shifting, sub-national jurisdictions, businesses, and other countries remain committed to global targets. Though the goals of the Paris Agreement have now been ratified by 132 countries, we are facing an “ambition gap.” The current actions of the international community aren’t enough to achieve the two-degree goal – in fact, we’re still heading towards two to five degrees of warming.
GLOBE Capital would like to call on key players in Canada to take climate action and protect the future economy. There is a role to play for government, businesses, and investors.
We encourage all levels of government to build on the vision of our future economy, characterized by low-carbon growth, cleantech exports, and highly-paid employment opportunities. Support and implementation of policies that put a price on carbon will be important, while working closely with the private sector to address barriers to the capital deployment of low-carbon energy products and technologies.
Businesses should incorporate climate change considerations into management and board mandates. Government policies should be monitored at all levels, considering nuances in policy around carbon pricing, renewable energy targets and green procurement that require specialized responses.
Investors should determine the carbon intensity of their portfolios and understand where their investments fall on the ‘decarbonization spectrum.’ Investment risks stemming from projected climate change need to be managed. For example, investors should consider not only how rising carbon prices might change valuations, but how impacts such as extreme weather events could affect cashflow and insurance rates, or decrease financial returns from projects that need to integrate adaptation features into design, construction and operations. Consideration must be given to the value of shifting capital flow into low-carbon investments. Good data is key – investors must identify sources and partners that can provide accurate information. Augment this information by demanding transparent disclosure on climate-related risks: are the companies in which you’re investing assessing these risks and more importantly taking steps to mitigate them?
Overall, to survive and thrive into the future, investors will need to alter their overall decision-making strategy and approaches to risk management. The first step is understanding, the second is strong data and analysis, and the third is integrating it all into a business strategy that connects back to the foundation of investment: enhancing returns and driving economic growth.
Shifting to a low-carbon economy will require deep and lasting structural changes to the way investors and governments manage risk and find opportunities. We’re convening senior leaders, including TAF’s CEO, from the North American financial community to discuss this theme and more at our first-ever GLOBE Capital leadership summit in Toronto on April 4-5.
This blog is an abridged version of the original piece, published on March 16, 2017 on the GLOBE Series website.