The Importance of Looking Forward to Manage Risks: Submission to the Task Force on Climate-Related Financial Disclosures

Grantham Research Institute on Climate Change and the Environment | ESRC Centre for Climate Change Economics and Policy, London School of Economics and Political Science / by Dimitri Zenghelis and Nicholas Stern

[From Press Release] Companies that fail to plan for business scenarios in a low-carbon economy risk decline or even bankruptcy, according to a submission to the [Bloomberg] Task Force on Climate-Related Financial Disclosures…

The authors of the submission, Dimitri Zenghelis and Nicholas Stern, argue that there is a significant gap between the stock market valuations of carbon-intensive companies today and what their value would be if the commitments made in the Paris Agreement on climate change were taken seriously. This has serious consequences for investors…

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

The authors argue that companies should not only disclose the “carbon exposure” of their past activities, but they should also undertake an assessment of forward-looking business risks.

They call for companies to carry out ‘stress tests’ for the risks associated with climate change, including business risks from new policies to reduce greenhouse gas emissions, and to disclose to investors their findings, as well as their strategies for dealing with those risks.

The submission states that “it is becoming increasingly risky for companies to pin all business strategies on the assumption that extensive decarbonisation will not happen” and that “business models reliant on the assumption that governments were not serious in Paris are looking increasingly vulnerable.”..


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