Major investors and corporate America may be at odds over a range of governance issues today, but they do seem united on one important topic: climate change. New research illustrates just how serious the concerns are on both sides of the divide.
According to research released this week by UBS Asset Management, a groundswell of institutional investors now believe environmental factors will overtake financial performance metrics in the next five years in terms of importance to their capital allocations. In fact, more than 80% of large investors surveyed by UBS said it would represent a “material risk” to leave environmental, social and governance criteria out of investment decisions. A similar percentage of asset owners representing pensions, endowments, and sovereign wealth funds said they already take ESG factors into account, according to the survey.
Meanwhile, a recent survey reveals that a large number of companies from across the industrial spectrum are coming to grips with the possibility that climate change could dramatically threaten their financial health in the near future. More than half of the approximately 7,000 companies included in the global climate change analysis from CDP, a nonprofit organization that collects and maintains environmental data, said they have incorporated ESG considerations into their risk management processes. Additionally, CDP found that estimates of the potential financial impact from the environmental risks reported by 215 of the world’s largest companies totaled nearly $1 trillion. (Companies that neglect to account for threats to their businesses posed by climate change may want to consider the fate of California utility company PG&E Corp., which filed for Chapter 11 bankruptcy protection in January in the wake of wildfires across the state.)
Some publicly traded companies are beginning to lay out environmental risks in their filings with the Securities and Exchange Commission. For example, Ohio-based oil company Marathon Petroleum Corp. included a note regarding “a number of environmental enforcement matters arising in the ordinary course of business” in its latest quarterly report. Marathon also disclosed that it has accrued liabilities for remediation of hazardous waste disposal sites. Additionally, the oil company said it is facing lawsuits from “governmental and other entities” in multiple states alleging damages related to climate change. Houston-based oil company ConocoPhillips made similar disclosures in its latest quarterly report.
Another company that disclosed its involvement in climate change lawsuits is Peabody Energy Corp. The St. Louis-based company said in its most recent quarterly filing that it had been named as a defendant along with multiple companies in three “nearly identical lawsuits” filed by local governments in California. The lawsuits charge that the fossil fuels produced by Peabody and the other companies caused the sea level to rise, damaging their communities.
These novel climate change suits are winding their way through the court appeals process. To quote Marathon: “At this early stage, the ultimate outcome of these matters remain uncertain, and neither the likelihood of an unfavorable outcome nor the ultimate liability, if any, can be determined.”
The energy sector seems like an obvious source of more ESG-related disclosures. Yet, in light of the growing importance of environmental issues to investors, look for a broader range of companies to begin including similar notes in their public filings going forward.