While companies can do a great deal to mitigate the damage done to the environment by changing the way they do business, the critical challenge is getting management to see and understand the efforts necessary to accomplish this important change. Construction is responsible for a growing percentage of the GHG (greenhouse gases) released into the atmosphere through its own activities and the design of the buildings being put up. Design and architecture changes are being implemented, through projects such as LEED and Net Zero certification, but not every company is focused on meeting those standards in the near term. Corporate management must be responsive to the challenge and research firms are offering advice—and in some cases, mandates—to effect the corporate changes.
As the economy moves toward reopening after the impact of the COVID-19 pandemic lessens and vaccines are lowering the infection rate, the climate change challenge will come to the fore once again. Today’s economy remains heavily reliant on fossil fuels; however, the transition to a net zero world is creating significant investment opportunities across a variety of sectors, including power, transportation, industry, construction, and agriculture.
Money, the ever-present need for doing business, will flow to those companies that make a concerted effort to understand and address the issue. Investment capital, especially, will use a company’s position on climate change in determining how much backing will be given. This can be seen in the public statements of companies such as BlackRock, a major investment management firm.
The BII (BlackRock Investment Institute) believes that tackling climate change will drive significant economic improvements over the coming two decades and that the commonly held notion that it has to come at a net cost to society is wrong. BII sees higher returns for certain asset classes and sectors due to their more favorable positioning for a shift to a global economy with net-zero greenhouse gas emissions. BII unveiled its new CMA (Capital Market Assumptions), incorporating risks and opportunities tied to climate change. BII’s CMAs are a building block of portfolios the firm designs and implements for clients.
Most economic projections do not yet factor in the potential costs of any physical damage from climate change; the costs and benefits of an energy transition; and the effects of policy changes, including increased government spending on green initiatives, associated with meeting the goals of the Paris Agreement. By incorporating these considerations, BII estimates that an orderly transition to a net-zero-emissions world could result in a cumulative output gain of nearly 25% over the next two decades, relative to no action being taken to prevent climate change. Therefore, BlackRock believes there are significant investment opportunities in the transition to a net-zero economy and by quantifying those opportunities it can build portfolios that benefit from exposure to the transition, which is an integral part of its fiduciary duty to clients.
BlackRock Investment Stewardship (BIS) also published a new report, Climate risk and the transition to a low carbon economy, which provides more detail on what they would like to see in company plans for prospering in a low-carbon economy. BIS expects companies to disclose a plan for how their business model will be compatible with a low-carbon economy, where global warming is limited to well below 2° C. The plan should be integrated into company strategy and include short-term, medium-term, and long-term targets and goals. They expect directors to have sufficient fluency in climate risk and the energy transition to enable the whole board—rather than a single director who is a “climate expert”—to provide appropriate oversight of the company’s plan and targets.
Members of the board and management team should have climate expertise appropriate to the company’s business model to ensure adequate consideration of these risks and opportunities in strategy and operations. Such expertise in management and the board should enable the company to provide disclosure that informs investors and other stakeholders of the company’s approach and progress in the following areas:
- Mitigating risk
Increased emissions globally are intensifying the impacts of climate change, including sea level rise and extreme weather events, which in turn impact every aspect of the economy—logistics, travel, food production, health, infrastructure, finance, housing, etc. Additionally, global regulators are aligning on how to achieve a low-carbon transition, via country-specific net zero emissions goals, carbon taxes, regulations, investment in alternative energy, etc. Companies should consider how they will manage the impacts that these risks have on their business and demonstrate preparedness to operate in a low-carbon economy.
- Capitalizing on efficiencies
Careful consideration and evaluation of a company’s GHG footprint may lead to operational efficiencies—such as decreased energy use, streamlined manufacturing processes, and technology enhancements to reduce waste—each of which can ultimately increase long-term shareholder value.
- Innovation and opportunity
Innovation and opportunity are inherently linked. Companies that produce viable solutions to address changing market demands are best poised to capture additional market share as consumer preferences, regulation, and global demand shift. Companies also have an opportunity to utilize, and contribute to, the development of current and future low-carbon transition technologies, which are important components for the rate at which emissions can be reduced.
And companies must consider one of the most important elements of environmental stewardship, sustainability. From January to November 2020, investors in mutual funds and ETFs globally invested $288 billion in sustainable products, a 96% increase over the whole of 2019. This increasing shift towards sustainable assets has resulted from a range of factors –improved sustainability data, a widened array of sustainable investment options, and a growing consensus about sustainability as a persistent driver of returns. This is fueling a global reallocation of capital towards more sustainable companies that will continue over many years.
While other investment firms may have similar or different criteria to address a company’s approach to the climate change challenge, BlackRock’s direction bodes well to become an investment industry standard. Meeting these requirements will, if nothing else, give a company a leg up and a foot on the path to helping reduce greenhouse gas emissions though management recognition of the climate change challenge.
Original Article: https://constructech.com/climate-change-and-corporate-management/
