Why Companies Shouldn't Hide The Financial Risks Of Climate Change

A formidable group, led by billionaire Michael Bloomberg, is pushing for more transparency.

The threats posed by climate change could become as ubiquitous in companies' financial reports as their earnings and sales information, if Michael Bloomberg has his way.

The challenge? Getting disparate companies and industries to agree on a common set of standards that would allow the public to compare them against one another.

Governments and environmental groups reckon that improving companies' disclosures about the risks posed by climate change are key to promoting the kind of change in business practices necessary to limit global warming to "well below" 2 degrees Celsius (3.6 degrees Fahrenheit) above pre-industrial levels, the aspirational goal of some 200 nations that agreed in December to aggressively combat climate change.

A 2-degree rise in global temperatures is forecast to lead to increased risk of flooding, more intense hurricanes and bigger wildfires, in addition to other dangers. A larger increase could be catastrophic.

Companies such as Exxon Mobil Corp. and the Warren Buffett-led Berkshire Hathaway Inc. have resisted disclosing details about the potential impact climate change could have on their operations and profitability, leaving investors, creditors and regulators in the dark.

Few have pushed for more transparency, leading environmental groups to fear a collective corporate reluctance to tackle the issue in the face of increasing evidence that climate change has begun to damage the environment.

But a change in corporate attitudes could eventually benefit the global economy if companies, their creditors and investors worldwide more accurately measure climate change risks, according to a report Friday by a group of executives led by Bloomberg, the billionaire and former New York City mayor.

For example, fossil fuels such as oil and coal could quickly fall out of favor once the risk of climate change is baked into its cost, leading to a surge in investment in green energy, or sustainable business practices, that could limit the effects of climate change.

First, companies have to measure the potential impact of climate change on their businesses and disclose that information to the public, the Bloomberg-led group said.

It won't be easy.

There's little consistency in the kind of climate change-related information that companies disclose. Some merely use boilerplate language to describe climate change risks. Others barely disclose anything at all. So it's difficult to compare companies or sectors in order to judge which are most vulnerable to the effects of the warming planet.

The Financial Stability Board, an international body of financial regulators, wants to change that by publishing standards it hopes companies will voluntarily adopt.

The board appointed Bloomberg to lead the group of executives working to recommend how companies should disclose the dangers they face from climate change.

The industry-led group's final report isn't due until year-end, but the interim report it published Friday offers clues to the kinds of disclosures it hopes companies across different sectors of the economy will embrace.

For example, companies should explain how climate change could impact their business model or future cash flow. If there's no risk, they should say so, rather than hide behind generic language.

In estimating the potential impact on their bottom lines, companies also should disclose the assumptions they used, and how a change in those assumptions could lead to different estimates.

Also, companies' senior executives and board members should be reporting their potential climate change risks in a way that gives investors and creditors financial information that they need in order to decide where to invest and lend their money.

Consistency will be key, the Bloomberg-led group said. Companies' disclosures "should allow for meaningful comparisons of business model and strategy, activities, risks, and performance across companies and within sectors and jurisdictions," according to the group's report.

Much like U.S. companies use generally accepted accounting principles, or GAAP, to report their earnings information, the Bloomberg-led group appears to be pushing for a common set of standards that would allow the public to compare companies and industries.

"Given the scale of the climate change challenge that we face, and the profound economic impacts if we get it wrong, it’s vital that corporate organisations, as well as those institutions that finance them, clearly understand the risks involved and manage these effectively," said Jon Williams, financial services and climate change partner at accounting and consulting firm PricewaterhouseCoopers.

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