Sustainable Finance Scientific Council
The S&P Global Sustainable Finance Scientific Council fosters an exchange of ideas between diverse stakeholders to help the global capital markets transition toward sustainability.
Climate Change Litigation: The Case For Better Disclosure And Targets
The Appetite (And Success) For Climate Litigation Cases Is Arguably
As the effects of climate change are realized and the global push toward decarbonization accelerates, various stakeholders--including nongovernmental organizations, investors, and communities--are increasingly turning to litigation according to some scholars on the topic. Indeed, the number of climate change-related court cases filed globally nearly doubled between 2017 and 2020, with more than 1,800 cases filed in 40 countries as of May 2021, three-quarters of which were lodged in the U.S., primarily related to corporate entities and governments (Setzer & Higham 2021).
Key Takeaways
- - The volume of climate change-related litigation against companies and governments worldwide appears to be growing.
- - Climate change attribution science is strengthening and could increasingly contribute to judgments against heavy emitters.
- - We believe climate-related judgments may ultimately have financial and reputational consequences for affected issuers.
- - While to date climate litigation has not had a material credit impact, it is one of many potential levers that could make transition and physical risk crystalize sooner for issuers globally.
- - In this paper, we explore in case study form the current state of climate litigation globally and suggest ways in which the potential financial and reputational risks associated with this emerging issue could be identified and managed
The Appetite For Better Climate Risk Analytics Is Growing
Trucost (part of S&P Global) has found that two-thirds of global companies have at least one asset that is highly exposed to the physical impacts of climate change under the most severe 2050 climate change scenario (which assumes a global average temperature rise of 3.6 degrees Celsius). Without understanding the potential physical impacts of climate change on entities, market participants (governments, financial supervisors and corporate regulators, and financial services companies, among others) will find accurately pricing in climate-related risks and opportunities an increasing challenge. Indeed, this may also prove challenging for financial institutions, as owners or capital providers, as well as savers who depend on improved returns and interest. The availability of climate risk analytics has increased exponentially, and may help entities understand their exposures. However, the lack of standardization and the complexities of climate science (as well as the precise crystallization and severity of impacts) is compounding the uncertainties.
In our view, enhanced climate risk analytics combines outputs from climate models and other dedicated models (IAMs for example), scenario planning, and other entity-derived and asset-level data, with analytical judgement based on interactions with entities, to develop better informed views about entities' potential exposure to the physical impacts of climate change.
Key Takeaways
In the absence of a perfect solution, enhanced analytics can provide market participants with greater clarity about an entity's exposure to physical climate risks. Climate risk data is best used to inform analytical judgement, to improve transparency, and to enrich market participants' dialogue with exposed entities.
Appetite for such data--describing an entity's potential exposure to the future physical impacts of climate change--is growing. The availability of climate risk analytics is growing exponentially and is putting the spotlight on entities' unmitigated exposures.
Translating the outputs of climate models into specific potential impacts is far from straightforward, more so when considering the financial materiality of climate events.
Standardizing terminologies and data quality thresholds, as well as establishing appropriate use cases, will aid the comparison of outcomes and help avoid maladaptation and misuse. Supplementing climate model outputs with entity-specific data will help to rationalise information.
Using multiple scenarios may help decision-makers consider a broader range of outcomes. In risks-and-opportunities assessments, this could bring greater clarity as to the types of interventions that may be required and help assess the adequacy of entities' responses to climate risks.
The next generation of models is well placed to help rationalize the complexities of climate science. Integrated Assessment Models (IAMs), non-equilibrium models (models that assume more complex, non-linear relationships between climate variables), and/or dedicated case studies offer potential solutions as well as their own challenges.
Natural Capital and Biodiversity: Reinforcing Nature as an Asset
Where Do We Stand?
Biodiversity loss is a global phenomenon. The recent Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services estimates that of the eight million plant and animal species on earth (75% of which are insects), around one million are threatened with extinction. In the U.S. and Canada, bird numbers have declined by a third since 1970, with even the most abundant species, like starlings, seeing a 49% decline over the same period. The Yangtze River dolphin, last seen in the early 2000s, is thought to be the first dolphin species to be driven to extinction by humans. And Australia's regent honeyeater is also now facing extinction because declining numbers are inhibiting the males' ability to learn their courting song.
Nature is evidently suffering, but what can governments and corporations do to reverse these alarming trends?
Key Takeaways
Climate change and biodiversity loss are interlinked, but solutions to reduce greenhouse gas emissions are unlikely to benefit biodiversity in the same way.
Instead, biodiversity needs to be given equal consideration in any nature-based climate solution offering.
The biodiversity crisis is a still-nascent ESG consideration for investors but it is climbing up the agenda.
Governments and companies are increasingly viewing the incorporation of natural capital into assessments of wealth and performance as fundamental to addressing biodiversity loss.
Targeted corporate and government actions to reduce deforestation linked to soy, beef, and palm oil will form a key part of the response, as will supporting smallholder farmers and indigenous communities to protect nature.
Stakeholder Capitalism: Aligning Value Creation With Protection Of Values
Although broadly defined, the core premise of stakeholder capitalism is to find a balance and compromise in meeting the needs and serving the interests of all stakeholders: customers, employees, suppliers, communities, society, and the environment, as well as shareholders. It implies a company's purpose is to create sustainable long-term and shared value for all. Value creation is not just about profit maximization for shareholders but instead encapsulates a more holistic purpose, aligning the broader values of a corporation with those of society, while taking into account externalities, as Mark Carney, former governor of the Bank of England, described it in his recent BBC Reith Lecture in December 2020.
Traditionally, market focus on quarterly financial performance has kept pressure on management to meet shareholders' expectations. Companies have considered it paramount to maximize financial value, echoing Milton Friedman's belief that "the only social responsibility of business is to increase its profits". But what about a firm's value for society as a whole?
Key Takeaways
Companies are increasingly adopting stakeholder capitalism, focusing on long-term value creation for customers, employees, society, and the environment rather than just short-term value for shareholders.
How can a company manage its relationships with its workforce, the societies in which it operates, and the political environment? This is the central question behind the “S” in ESG investing — the social aspect of sustainable investing. Social factors include a company’s strengths and weaknesses in dealing with social trends, labor, and politics. A focus on these topics can increase profits and corporate responsibility.
The COVID-19 pandemic is sharpening the focus on stakeholder management: substantial government support to corporations has raised expectations of corporate responsibility to society.