Risky Business: Corporations need market signals to reduce climate risks (podcast)



ImpactAlpha, January 30 – Will it be risk – rather than returns – that drives impact investment?

Bank of America worries about mortgage defaults from storm-flooded homeowners. Disney frets its theme parks may become too hot for vacationers. AT&T is concerned about hurricanes and wildfires that could knock out its cell towers. Coca-Cola wonders whether there will be enough water to make Coke.

Major companies are starting to face up to the very practical implications of climate change, as indicated by responses to CDP, the U.K. organization formerly known as the Carbon Disclosure Project. The latest episode of ImpactAlpha’s Returns on Investment podcast explores the connection between such risks and the mobilization of investment to address them.

Roundtable regular Imogen Rose-Smith, an investment fellow with the University of California  said companies are not taking sufficient action to mitigate climate risk, much less other risks, such as rising income inequality.

“The markets are not accurately pricing the risk associated with catastrophic climate change,” she said. “But what do you want the markets to do? Do you want them to be paralyzed by a risk that has yet to manifest itself?”

The conversation picks up threads from earlier episodes of Returns on Investment. The Jan. 9 episode predicted that 2019 is the year climate risk hits the market, with “the institutionalization of climate change in all sorts of investment products,” as Equilibrium Capital’s Dave Chen put it. Inside corporations, he said, “We’re seeing the operationalization of climate risk.”

Institutional Shift: Climate risk hits the market and other impact investing trends to watch in 2019 (podcast)

Indeed, many “impact investments” don’t show up in funds or portfolios, but as corporate investments in supply chain resiliency, infrastructure upgrades or even workforce training. “Risk is driving companies to pay much more attention to things that we would call ‘impact’ and ‘impact investing,’” I said in the podcast discussion. “Fear is always a strong motivator.”

One company’s risk-mitgation is another’s entrepreneurial opportunity, of course. Adapting to climate change, perhaps even more so than mitigating it, is the entrepreneurial opportunity of a lifetime, as Root Capital’s Willy Foote put it recently. Strategic corporate venture capital investment has become an important source of financing for such innovation.

SoftBank, Salesforce and Orange signal corporate venture capital’s tilt towards impact investing

But there’s plenty more where that came from. The implicit message from the wave of corporate share buybacks, particularly since the 2017 U.S. tax cut, is that there are not more productive uses for the cash hoards that tech and other companies have accumulated.  

“What we’re saying on this podcast is ‘Hey, there are plenty of places to put your money as you prepare for the challenges of the future and the opportunities of the future,’” I suggested.

Tying back to another recent podcast, on the value of ‘ESG’ (for environmental, social and governance) factors in evaluating corporate performance, I suggested that how corporations deploy their cash is a major ESG indicator. “It’s a sign of how seriously they are taking this.”

If ‘ESG investing’ is so great, why is the world going to hell? (podcast)



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