Ignore climate risk at your peril

Even those on the breeziest of summer news diets probably caught wind of a disquieting climate change-related story: the burning Amazon, perhaps, or Greenland’s massive ice melt (which also captured the imagination of a certain world leader).

Some of your clients may have experienced climate events first-hand while vacationing in a scorching Europe or in flooded Great Lake towns, or while cottaging in regions newly inhabited by ticks. Wherever they were, they may have noticed that July 2019 was the hottest month ever recorded.

The effects of climate change are now inescapable across the business world, too. The Chamber of Marine Commerce warned that water flowing from the Great Lakes would interrupt navigation on the St. Lawrence Seaway at a cost to businesses of more than $1 billion. Cognac distillers fretted over hotter summers causing saccharine grapes and threatening their US$3.6-billion-a-year industry.

It’s become impossible to brush off climate change as a public policy puzzle to solve down the road. Lately, the investment industry has been taking the challenge more seriously than many governments.

Rating agencies and index providers are purchasing climate modelling firms to bolster their ability to assess climate risk and build products, while regulatory bodies adapt disclosure requirements. In Canada, three developments are particularly revealing.

In May, not long after regions in Eastern Canada declared states of emergency due to flooding, the Bank of Canada began including climate change as a vulnerability in its financial system health report. Insured damage to property and infrastructure averaged around $200 million from 1983 to 1992, the report said; between 2008 and 2017, the average was $1.7 billion—8.5 times higher.

The changes needed to keep global temperatures from rising could also create transition risks. For example, oil reserves could be left in the ground, impacting not only energy companies but also the banks and asset managers that finance them and own their shares. (Together, financials and energy account for nearly half of the S&P/TSX Composite.)

The central bank warned that assets that fail to price in climate risk could destabilize the financial system.

A month later, the federal government’s Expert Panel on Sustainable Finance recommended measures to incentivize sustainable investments. The panel proposed increasing contribution space in registered plans for “accredited climate-conscious products,” complete with a “super” tax deduction of more than 100% on those contributions.

Led by former Bank of Canada deputy governor Tiff Macklem, the panel also said interpretations of fiduciary duty aren’t keeping up with climate change. Legal experts told the panel that fiduciaries who “fail to consider relevant long-term [environmental, social and governance] matters, such as climate-related risks or the potential for stranded assets, could expose themselves or their firms to legal liability for various claims.”

In August, the Canadian Securities Administrators (CSA) weighed in with updated guidance for companies to disclose climate risk, which it called a “mainstream business issue.” The guidance defined a risk as “material” if it would affect “a reasonable investor’s decision.”

Large institutional investors are already developing granular methods to measure climate risk. This is leading to more pointed engagement with listed companies about how they will transition to a low-carbon economy, with consequences for those without plans.

Taken together, that’s a lot of attention from a lot of influential sources. And that attention is only going to become more intense during a federal election in which a carbon tax and broader climate issues could feature prominently. The question for advisors is: What are you doing about it?

The expert panel found “a limited and inconsistent awareness” of climate considerations among individual investors and “their investment agents or advisors.” That’s an increasingly untenable position. Advisors who don’t take climate risks seriously may be risking not only their clients’ portfolios but a portion of their own books as well.

Flows into U.S. sustainable funds set a record in 2018 at US$5.5 billion. The first six months of this year have already seen inflows of US$8.9 billion, according to Morningstar. In Canada, data from previous years show interest is growing here, too. Advisors who aren’t prepared to discuss strategies that address climate risks and opportunities will find their clients seeking advice from advisors who are.

Mark Burgess is managing editor of Advisor’s Edge. Email him at mark.burgess@tc.tc.

Mark Burgess

News

Mark was the managing editor of Advisor.ca from 2017 to 2024.