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Company transparency on climate change

Shift in standards

A global body will soon come up with a standard for how companies can reveal the risks of climate change on their business. For now, such ‘sustainability’ accounting rules should remain voluntary.

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The world’s wealthiest countries, known as the Group of 20, largely set any new rules for the global financial system. And because they also account for 85 percent of carbon emissions, they might also soon set another kind of standard: how companies should disclose information about the impact of climate change on their businesses.

Like much of the debate about global warming, the issue for the G20 is whether such disclosures should be mandatory in each country. Are investors entitled to know the risks to a company from climate change – or perhaps their contribution to it?

Last year, the G20 delegated the task of coming up with a method to measure such risks to its advisory body, the Financial Stability Board. That body was created after the 2008 economic meltdown to come up with voluntary standards for banks in hopes of preventing another financial crisis. So far, those rules are doing pretty well. Now the board, which is run by Bank of England Gov. Mark Carney, plans to issue recommendations on climate-related financial disclosures by the end of 2016.

At a minimum, the proposed standards would need to be reliable and comparable across industries. But they will also probably come up with ways for companies to show how they are planning for three possible events: physical damage from climate change, liability from climate events, and government actions that would curb carbon emissions and promote green energy.

Predicting any one of those scenarios is extremely difficult. Computer models for climate change, for example, offer quite a range of possible temperature increases during this century. New technologies might disrupt the energy mix. And in most countries, a change of government can bring a change in energy policy.

Still, says Mr. Carney, the right information from a company would allow climate-change “skeptics and evangelists alike to back their convictions with their capital.”

Preventing rapid climate change is an essential global task. Last December, most nations signed on to the landmark agreement reached at the United Nations climate change conference in Paris. While the goals in the pact are voluntary, they nonetheless reflect a widening consensus for action. Much of the pact relies on transparency by each nation to disclose its progress on curbing emissions.

A similar voluntary standard of transparency should hold for companies, many of which are already working to prevent climate change or feeling pressure from investors to reveal the risks. When global standards are finally set on climate-related disclosure, each nation can then decide how much to nudge companies to follow them. It will be difficult enough to assess the exact risks from climate change. The first task is to solidify a global consensus to act. Persuasion more than coercion could be the quickest path.

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