Today marks three years since Hurricane Sandy ravaged New York. The skyscrapers of the city swayed, tunnels and subways filled with water, power supplies to hospitals and 8.5 million households and businesses were lost, and for the first time in over a century weather shuttered Wall Street for two days. The total economic cost was over $60 billion. And, of course, we can’t forget that 285 lives were lost.
From a financial point of view, the unprecedented damage and costs of lost productivity were generally absorbed by the U.S. economy without the negative impact being too significant.
But what if Hurricane Sandy was not such a rare occurrence? What if such events happened every year, or even more frequently, impacting major assets in both developed and developing markets? The value of sectors from electric utilities to infrastructure and insurance could be critically damaged in a matter of hours. For example, research by MSCI suggests that across the 15 largest electric utility companies, 62 percent of the aggregate installed capacity is located in areas vulnerable to floods and cyclones.
At Ceres we work with hundreds of investors across the globe, and it is clear that those with long-term horizons see it as their duty to consider such devastating financial and physical costs. However, planning is difficult, if not impossible, without access to the right information.
Just as information from barometers and thermometers can help us prepare for tomorrow’s weather, so corporate information on environmental, social and governance (ESG) issues can help investors make better decisions and prepare for the future. In this case it is information such as whether supply chain management takes account of climate risk, whether fixed assets are based in areas prone to flooding and cyclones and whether the scale of a company’s greenhouse gas (GHG) emissions is contributing to more extreme weather events over the long term.
The problem is that too few companies report on such ESG factors. And when they do, it is often voluntarily reported, which tends to mean different methodologies and measures too inconsistent for investors to compare efficiently.
Consider GHG emissions reporting. Such emissions contribute significantly to climate change and pose significant financial risk. Yet barely 37 percent of all listed companies report their GHG emissions — many of them using different standards. How can the investment community effectively manage and mitigate exposure to climate risk when less than half of all companies do not report on their emissions?
If we are going to get companies to report on these financially important indicators and play a part in mitigating losses from the next Sandy, we need to enlist the entities with the power to change corporate reporting at pace and scale — and that is the world’s stock exchanges.
Globally, stock exchanges boast more than 43,000 listed companies, and through their rules they set consistent guidance and structures across global markets. When it comes to corporate financial reporting, they are the keepers of the codes and protocols that make global capitalism possible.
There is no reason global stock exchanges cannot coordinate the reporting of sustainability metrics just as they do with financial metrics. This is likely to start with the basics: employee turnover, energy use, greenhouse gas emissions, injury rates, water risk, product quality, labor standards and human rights due diligence, to name a few. But investors increasingly want more indicators of quality of management and operational excellence, such as measures of resilience against extreme weather and the governance and board oversight of environmental and social risk.
We’ve already seen some leadership in this area by several stock exchanges, driven in part by my nonprofit group’s work. The stock exchanges of South Africa and Australia already have listing rules on ESG reporting, and Hong Kong, Singapore and Malaysia have all recently proposed rules on sustainability reporting for listed companies. Here in New York, Nasdaq has helped launch a sustainability working group for the World Federation of Exchanges and was the first North American exchange to join the United Nations’ Sustainable Stock Exchanges Initiative.
But we need more exchanges to follow suit and to collaborate with their peers so that we don’t have a patchwork of 100 different ESG reporting regimes. And we need every exchange to step up and work closely with their listed companies to shape improvements in ESG reporting over time.
The good news for companies is that a more standardized ESG reporting system would actually save resources in most cases, as it is massively more efficient than the current mishmash of requests and regulations across markets. Research from Oxford and Maastricht universities this year found that companies can save millions of dollars on the cost of debt interest by releasing data on their carbon emissions.
Ultimately, if companies do not plan ahead, the costs of extreme-weather-related damage and higher insurance premiums will vastly outweigh the costs of measuring and reporting on these factors today.
We can never really fully prepare for a tragedy like Hurricane Sandy. But with access to the right information, institutional investors from New York to New Zealand can do a better job of reducing the exposure of their portfolios to a changing climate and, therefore, of holding in trust the assets of their members for decades to come.
Mindy Lubber is president of Ceres , a nonprofit organization mobilizing business and investor leadership on global climate change, water risks and other sustainability challenges.
