Bankruptcy looms for companies failing to carry out climate change 'stress tests'

Companies that fail to carry out "stress tests" for their business plans against risks associated with climate change face the possibility of economic decline or bankruptcy, according to a submission to the Bloomberg Task Force on Climate-Related Financial Disclosures from leading research institutions.

The authors warn that financial markets could struggle to cope if there is a sudden revaluation of companies exposed to the risks of climate change and to risks from efforts to reduce emissions

The authors warn that financial markets could struggle to cope if there is a sudden revaluation of companies exposed to the risks of climate change and to risks from efforts to reduce emissions

The Grantham Research Institute and the ESRC Centre for Climate Change Economics and Policy insist that stock market valuations of carbon-intensive companies will conflict significantly with future valuations if climate change commitments made in the Paris Agreement are fulfilled. Authors Dimitri Zenghelis and Nicholas Stern warn that business models reliant on the assumption that Governments were not serious in Paris are looking “increasingly vulnerable”.

“[There is a] gap between what politicians have signed up to in Paris and what markets and fossil fuel companies are assuming,” the submission states. “This gap should alarm policy-makers and central bankers: it suggests either asymmetric information or a lack of credibility in policies.”

Alternative scenarios

The authors suggest that capital investment will suffer unless companies undertake assessment and disclose strategies for dealing with forward-looking business risks such as new policies to greenhouse gas (GHG) emissions, technological advancements and changes to carbon taxes and prices. They warn that financial markets could struggle to cope if there is a sudden revaluation of companies exposed to the risks of climate change and to risks from efforts to reduce emissions.

The submission continues: “The speed at which such re-pricing occurs is uncertain and could be decisive for financial stability. If the transition is orderly then financial markets will likely cope.

“Resilience requires the presence of forward-risk management and hedging strategies. In addition to answering the question “what is your most likely scenario?” investors will seek to ask "what will you do in alternative scenarios such as a net-zero emissions world?” The answer to this puts market players in a better position to assess market capitalisation.”

‘Seek opportunities’

The Bloomberg Task Force was set up in December 2015 during the Paris COP21 summit to develop consistent climate-related financial risk disclosures “for use by companies in providing information to investors, lenders, insurers and other stakeholders”. The Task Force published its initial findings in March and is due to publish its final report by the end of the year.

The submission is the latest document to address how businesses view the risks and opportunities presented by climate change and severe weather.

A report last month from the Environment Agency urged businesses to "seek opportunities" from climate change, revealing a range of benefits for companies taking action to build resilience to extreme weather including business continuity, cost saving and competitive advantage.

Earlier in the year, research from CDP revealed that almost half of the key suppliers for global companies like Dell, Unilever and Walmart fail to respond to requests for climate information.

Lord Stern has previously urged businesses to lead by example on climate change “through the power of their example, including by producing low-carbon and otherwise sustainable goods and services, and by making big advances in their energy and resource efficiency”.

George Ogleby


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