Follow the money. Save the world. They’re not phrases commonly seen on the same page. But in the context of climate change, they increasingly go together. There’s a convincing body of evidence that reducing infrastructure carbon yields cost efficiency and opportunity for improved profit. The commercial benefits of cutting carbon should stimulate action, you would think. Yet for the most part, adoption by the infrastructure industry has been slow.
The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) presents an alternative financial motivation by connecting climate risk with financial risk and opportunity. TCFD was created in response to a warning by FSB chair and Bank of England governor Mark Carney to Lloyds of London, in 2015, about the potential scale and severity of climate-related risks to global financial markets.
Many of the biggest investors in infrastructure worldwide are signed up to the TCFD’s guidelines, which require disclosure of the climate risks to their investments. The aim is to protect shareholders from financial losses. TCFD is aligned with the aims of the Paris Agreement, which mapped out a route by which the world could get to 2100 with no more than 2°C of warming. It is concerned with, and provides a framework for reporting on, two categories of liability:
- The share of carbon related assets in investment portfolios.
- Exposure to acute and chronic weather patterns and the risks faced from litigation, policy and markets.
There are specific recommendations for disclosure by high emission sectors including infrastructure. Financial companies will also seek data from the asset owners and infrastructure companies they have invested in, to understand and disclose their own liabilities.
The potential scale of risk to the financial sector is illustrated by two recent studies. Barclays Bank showed that $33 trillion would be wiped off the value of companies in the fossil-fuel industry if the world cut carbon emissions to their target level overnight. The transition won’t be like throwing a switch, of course, but TCFD effectively warns investors to watch their capital very carefully as the energy economy evolves over the coming couple of decades.
If carbon emissions carry on at today’s levels, the world will warm 6°C by the end of the century. Aviva Investors calculates that the resulting physical damage and litigation costs caused would wipe $43 trillion, at today’s prices, off the value of financial markets. That’s 30% of the world’s manageable assets.
Disclosure under the TCFD is voluntary now, but it’s unsurprising that exchanges, pension funds, banks, ratings agencies and insurers are giving it strong support. They want to know their money is safe and will seek answers from those they lend to and invest in. That includes a great many infrastructure companies.
Are they aligned with the Paris Agreement? Are their emissions aligned with the 2°C pathway. Are their infrastructure assets adequately resilient in the face of the floods, droughts and storms that will result from unavoidable climate change?
It is not just about money already invested in infrastructure. It’s about future investment too. In 2016 McKinsey Global Institute estimated that to meet the word’s infrastructure needs up to 2030 would require US$49.1 trillion.
Infrastructure owners and operators need to be highly climate aware from now onwards. Money will continue to flow into investments that are compatible with a 2°C future. But the taps will be turned off for those that aren’t.
TCFD hasn’t been set up to save the world, but its likely impact on the way capital is directed will serve that purpose. All those planning, procuring, designing and operating infrastructure will be wise indeed to follow the money.