While American investors like Larry Fink of BlackRock are trying to get companies to account for the potential risks of climate change (such as costly drought and flooding), European investors want major companies to disclose the financial impact of the Paris Climate Agreement. In other words, the move to renewable energy—mandated by the Paris agreement—has its own financial risks: Could coal, oil, or gas in the ground become “stranded assets” that can’t be used and are therefore worthless?
David Vetter, writing in Forbes, reports that 38 European institutional investors have written an open letter to Europe’s biggest companies in energy, materials, and transportation, The investors, which manage $8 trillion in assets, want the companies to ensure that “material climate risks associated with the transition onto a 2050 net zero pathway are fully incorporated into the financial statements.” In other words, the key worry is the transition to non-fossil energy.
Specifically, these investors list five steps management should take (quoting directly);
• An Affirmation that the goals of the Paris Agreement have been considered in drawing up the accounts.
• Adjustments to critical assumptions and estimates: An explanation for how critical accounting judgments are consistent with net zero carbon emissions in 2050, in line with the Paris Agreement. If directors choose not to use Paris-aligned assumptions, they must explain why in the Notes to the accounts (and, of course, incorporate any material physical impacts that flow from accelerating Global Warming).
• Dividend resilience: Implications for dividend paying capacity of Paris-alignment (e.g. threshold assumptions that would trigger cuts to dividends).
• Consistency: Confirmation of consistency between narrative reporting on climate risks and the accounting assumptions, or an explanation for any divergence.
The bottom line: If governments succeed in getting countries to cut back on carbon, those restrictions could have enormous implications for fossil fuel companies. European investors, at least, want to be “in the know” about that.