Climate Finance | February 9, 2018

Climate-risk disclosure and the “tragedy of the horizon”

David Bank
ImpactAlpha Editor

David Bank

The classic problem in environmental economics is the “tragedy of the commons.” Bank of England Governor Mark Carney called out a related tragedy in a speech to insurers in London in September 2015.

“Climate change is the tragedy of the horizon,” said Carney, who also chairs the G20s Financial Stability Board. “We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors — imposing a cost on future generations that the current generation has no direct incentive to fix.”

Carney was kicking off the Task Force on Climate-Related Disclosure, which was chaired by former New York Mayor Michael Bloomberg. “Once climate change becomes a defining issue for financial stability,” Carney warned, “it may already be too late.”

Now, more companies are being forced to gaze at that horizon. Last week, an “Investor Agenda” backed by major public pension funds committed them to seek corporate disclosure in in line with the recommendations of the Task Force.

In Europe, the High-Level Expert Group on Sustainable Finance also recommended adopting the Task Force recommendations as standard reporting guidelines. More than 230 companies with combined market-value of more than $6.3 trillion have lent their support to the Task Force recommendations.

As if on cue, ExxonMobil treated investors to an object lesson in the value of such disclosure. Last week, in its regular report, Exxon forecast that population growth will drive up oil demand by about 20% by 2040. However, when Exxon modeled demand under the Paris climate agreement’s goal of holding global temperature increase to less than 2 degrees Celsius (3.6 degrees Fahrenheit) above pre-industrial levels, world oil consumption drops by 25% by 2040.

Even under that scenario, Exxon said it faced “little risk” to its oil assets, but critics are pressing for more detailed financial disclosure. Exxon undertook even the limited scenario-planning exercise only after shareholders voted overwhelming last year to insist the oil giant assess its climate-related risk. Crucial to the vote was the reversal of major asset managers like the $6.3 trillion BlackRock and the $4.5 trillion Vanguard Group, which bucked Exxon’s management on the issue.

Carney was counting on just such dynamics. “We can build that virtuous circle, of better understanding of tomorrow’s risks, better pricing for investors, better decision making by policy makers and a smoother transition to a low-carbon economy,” he said in his speech. “By managing what gets measured, we can break this tragedy of the horizon.”