Climate change's financial impact can increase costs and lower revenues, directly affecting profitability. This is another illustration of how environmental, social, and governance (ESG) factors can be financially material and why they should be included in investment analysis. Critics may feel that such factors are rooted in trendy issues du jour, negating their validity, or that financially material factors should be immediately obvious. While factor materiality should be continually reassessed, the prevalence of climate-related risks in corporate and government disclosures exhibits how once overlooked issues can have financial impact and how market forces can establish their credibility.
In June, the US Government Accountability Office (GAO) noted to Congress that 2018's climate related disaster events represented 25% of the total cost accumulated from 2005-2017. Despite this, the federal budget does not account for the impact of climate change on infrastructure – a clear example of non-financial factors affecting an entity's ability to meet financial commitments. Other entities have been forced to acknowledge possible risks to investors. Miami Beach's April municipal bond issuance mentions climate change as a key consideration in official offering literature as related expenditures could limit debt repayment ability.
Investors are taking notice of these considerations. The Task Force on Climate-related Financial Disclosures (TCFD) recently noted that financial firms responsible for USD 118tr in assets have explicitly backed their effort for climate risk disclosure, and companies are being forced to respond accordingly (see chart on following page). We believe that investors can benefit by evaluating these risks, mitigating potential long-term downside and helping drive further disclosure by investing and engaging with companies.
Climate-related disclosures on are on the rise
% of companies that disclose information aligned with TCFD recommendations
Andrew Little, Sustainable and Thematic Investing Associate, UBS Financial Services Inc. (UBS FS)