As more and more companies and investors conclude that sustainable practices make for sustainable returns, the assessment of corporations’ environmental, social, and governance (ESG) footprints has moved from a simple measure of corporate responsibility to an investment proposition. While this general focus on ESG policies is undeniably beneficial, companies today are presented with the additional challenge of actively planning for climate risk. With a growing consensus around climate science, companies and investors must plan for a number of different scenarios, depending on the extent and impact of global climate change. However, an absence of shared terminology, benchmarks, and policies threaten to stymie investors and companies as they attempt to account for climate risk.
Concerns remain that corporations and sovereigns may not be acting quickly enough to structurally address the issue of climate risk. Despite efforts to incorporate climate risk into their decision-making, some investors and regulators fear that the market doesn’t grasp the full scope of the costs and consequences of climate risk.
As laid out in its Agenda for Sustainable Development, the U.N.’s 17 Sustainable Development Goals offer a roadmap for enterprises to engage in sustainable finance while still pursuing their business objectives. Research indicates that companies that embed these goals in their growth strategies, suffer no statistically significant performance disadvantage at individual and portfolio levels, and may actually outperform their peers. As we embark on an era that has become popularly known as the fourth industrial revolution, defined by disruptive technologies, changes to climate threaten to further unsettle markets and create new winners and losers. Under these circumstances, sustainability becomes a strategic imperative for forward-looking firms.
Many investors and companies are seeking greater clarity and confidence in accounting for long-term climate risks and opportunities. Moreover, regulators and policymakers require a common framework to communicate the standards and practices of sustainable investing. Developing internationally accepted principles and performance indicators will help increase investment in initiatives like clean energy and sustainable infrastructure. In short, investors’ ability to speak a common tongue when evaluating opportunities would allow them to better assess the relative merits of one project or asset against another.