Asset class |
Current state |
Future state |
Debt |
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Equity |
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Specialist investments – infrastructure and property |
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Specialist investments – clean technology funds |
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Question 5: What could this mean for businesses in sectors outside the investment world?
In our increasingly interconnected world, all businesses will likely feel the effects of these changes occurring in the investment space. The cost of capital for company bonds will likely shift depending on their alignment with a two-degree world. On the equity side, companies’ reporting requirements and disclosures will likely increase as business face pressures on three fronts:
1. Shareholder activism: institutional investors and activist shareholders are pushing for climate risk disclosures, and these requests are likely to focus on aligning disclosures with recommendations from the Financial Stability Board (FSB).
2. Increasing regulation: in 2016, the French Government passed legislation requiring the finance sector to report on climate change risks. With the release of the FSB’s Final Report on Recommendations of the TCFD in June 2017, it is anticipated that further regulation may be introduced, consistent with these recommendations, by either governments or exchanges.
3. Growing legal implications: a number of lawsuits have already been filed against organizations with respect to not making adequate disclosures on climate change risks.
Although no company has yet faced legal or financial penalties in relation to its action or disclosures on climate change risk, the increasing attention on the issues has led to a broadening of the definition of fiduciary duty (e.g., the French regulatory framework (Article 173) and the Australian Prudential Regulation Authority (APRA) published a speech and referenced a legal opinion made by the Centre for Policy Development and the Future Business Council on company directors’ legal obligations to consider the impacts of climate change). [7]
In conclusion
Action on climate change has been in political limbo for decades in one area of the world or another. An internationally consistent approach to regulating greenhouse gas emissions and curbing climate change has not surfaced and looks less likely to occur than in the past. However, since the signing of the Paris Agreement, it appears we are now entering a new era where governments have set the long-term target and investors are responding to the financial challenge. This means that capital markets are likely to play a part in any transition in the short to medium term to get ahead of any significant transformation.
Businesses that don’t prepare for the changes in financial markets may face increasing future capital costs compared to peers. Identifying the opportunities from these changes and preparing a strategy for integrating them into your business could help build competitive advantage. This process may involve assessing capital expenditure items that could be packaged into green bonds and assessing current climate change risk disclosures against the FSB’s recommendations. As investor action increases on this issue, a 2oC alignment strategy will likely become standard practice for businesses looking to tap capital.
Summary
Businesses should begin to prepare for changes as capital markets respond to climate change.