At the end of the week, I found myself at the World Trade Center’s new transportation center, dubbed the Oculus for its design and lighting. It is a glorious symbol of creative resilience, a bold show of determination to transform disaster into beauty and functional elegance. It seemed a fitting place to settle my thoughts after a week of climate discussions, swathed in the glow and bustle of innovation at its best. An inspiration for our persistence.
Photo credits: Photos of the Empire State Building and inside and outside of the Oculus taken by author during Climate Week 2017.]]>
So what if we could take the idea of credit scoring to one of measuring risk related to carbon? A carbon score would be a standard, recognized number that rates a company’s risk based on internal and supply chain emissions as well as a range of factors impacting technology innovation and marketing in the shift to a low-carbon economy. This carbon score would apply to companies in all sectors, well beyond just fossil fuel-based firms.
Investor interest is growing
Investors are starting to create just this type of carbon scoring. Let’s look at what BlackRock, S&P and Bloomberg are doing to create these tools. BlackRock, the world’s largest asset manager, believes that climate and carbon risks are underpriced in their portfolios, so has developed a holistic climate score accounting for physical, technological, regulatory and social risks. BlackRock aims to “climate-proof” their portfolios by investing in companies poised to benefit from a low-carbon economy, and by under-weighting companies that are ignoring global trends.
Many risks that BlackRock evaluates have a flip side of opportunity:
While BlackRock’s scoring is for their own use, S&P has developed a similar metric for their corporate bond issuers. The S&P score ranks issuers on a five-point scale measuring exposure to Environmental, Social and Governance (ESG) risks, with a strong emphasis on environment.
Bloomberg has created a Portfolio Carbon Footprint analysis which they presented at the CDP Spring Workshop that I attended last April in New York. Bloomberg offers portfolio managers tools to evaluate the carbon efficiency, intensity and impact of their portfolios compared to a benchmark, using both proprietary and CDP data. Traders can drill down with attribution data to determine which sectors and companies are driving up a portfolio’s carbon risk, and reallocate as necessary while maintaining overall portfolio performance. The Bloomberg data allows investors to manage carbon risk in a way that I think of as an “efficient frontier” approach to balance risk and return.
These disparate efforts foretell just the beginning of investor interest in understanding carbon risk and the relevance to their investments. One challenge for broad adoption is that carbon risks show up over the long term, not in next quarter’s earnings, perhaps making these tools initially most attractive to longer term investors such as pension funds.
How should companies respond?
As adoption of these tools becomes more mainstream, companies would do well to understand what investors are looking for and how their share prices could be impacted. Capital reallocations could pose “phantom” risks to companies as capital bleeds off gradually from companies racking up high carbon or climate risk scores. Portfolio managers seldom call to let investor relations know their shares have been dumped.
The investment world needs a standard, recognizable carbon score that companies can understand and manage. While investors are working to optimize their portfolios, the real win from a global view will be when thousands of companies understand the how their carbon risk is calculated and start working to repair their scores by lowering emissions and creating more resilient businesses. Competition in the consumer credit world supports three different credit bureaus – TransUnion, Experian and Equifax – yet the meaning of the FICO score holds true universally and drives credit repair services to lower borrowing costs and access to credit. Just think what a broadly recognized carbon score could do to repair corporate and global climate risk.
Photo taken by author during trip to Tibet in 2011.]]>
All of this perhaps reflected the maturity of the companies I interviewed. Each had been working on their environmental initiatives for years, seeing continual savings and impact, along with growing pressure from their customers. Never wanting to appear forced, companies were prone to position their goals as driven by their leadership stance rather than dictated by others. But is investor pressure starting to count?
BlackRock recently announced that climate risk will be a “key engagement theme” in 2017 as the largest asset manager in the world seeks to understand how management at its portfolio companies are assessing climate impacts to their businesses. While BlackRock was tempered in its announcement, it made clear that it will not be placated, and unanswered concerns will be elevated to portfolio company Boards, who will be expected to have a basic understanding of the risks climate change may pose to their core business strategy and operations.
This may be a watershed moment for the role of business in climate change. The first step to any change is admitting you have a problem, so disclosing in writing that you are or are not considering the physical, legal, technological and social risks of climate change is that foot on the ground. A continual drip of questions will create a stream of issues that must be recognized or blatantly ignored.
Companies are wise to get ahead of stakeholder pressure, whether from investors, customers or regulators, so they can dictate their destiny. You may think of investor pressure as something suffered only by oil companies and utilities, but every company is about to get a wake-up call from its owners. Once BlackRock’s companies start digging into their climate risks, they will find upstream and downstream impacts that involve a growing circle of businesses. The bases are loaded for action.
Photo courtesy of Moses Luski.]]>
What are the critical mistakes?
Advisers can open doors, build your credibility, provide a wise sounding board, and help you steer clear of landmines. Recruit and nurture advisers as a valuable asset, and reap the rewards.
Photograph courtesy of Gabriella Santander.]]>
Here are Mr. McColl’s top takeaways on leadership:
When asked what he was most excited about regarding Charlotte’s future, Mr. McColl sited the new companies being formed here and moving here. He sees the spinoffs and brains pouring out of our big companies as a huge catalyst for opportunity in Charlotte. He’s also excited about the light rail connecting uptown to UNCC and of course, the new baseball field in city center.
Mr. McColl, thank you for your years of mentoring and inspiring us!