A firefighter moves a hose as he attempts to rescue homes on Mountain Hawk Drive while the shady fire burns in the Skyhawk area of Santa Rosa, California, on September 28, 2020.
Scott Strazzante | San Francisco Chronicle | Hearst Newspapers via Getty Images
The recommendation that public corporations disclose their plans to achieve carbon neutrality by 2050, as suggested in the recent letter from Larry Fink, CEO of BlackRock and others, should be embraced by corporations and investors and pragmatic by regulators worldwide implemented.
We, a long-term investor and a seasoned market regulator, embrace this disclosure framework for what it will do – vastly improve the mix of decision-making information – and what it will not – direct corporate strategy or, worse, pick winners and losers. Based on the work we have done with FCLT Global and others, we believe it can be implemented quickly and effectively.
Based on the generally accepted thesis that environmental regulations will drive economic activity in the direction of CO2 neutrality in the next thirty years, this recommendation offers a focus for a meaningful engagement of investors and companies.
Past transformations show the wisdom of this approach. Imagine an important investment question that originated in the 1990s: How will your company deal with the transformation to a digital economy?
For the past thirty years, investors have used this forward-looking information to evaluate companies and to assess broader shifts in economic activity. Also note that the answers to this digital transformation question have changed dramatically from year to year due to the dynamics of the market, including innovation, globalization and the development of human capital.
A transition to a climate neutral economy will undoubtedly affect the performance and prospects of many companies and sectors. Some will benefit greatly, others will suffer or even fail.
A transition to a climate neutral economy will undoubtedly affect the performance and prospects of many companies and sectors. Some will benefit greatly, others will suffer or even fail. These outcomes will be the result of myriad strategic decisions and many changing economic and regulatory factors.
Investors are right to understand how these considerations will affect the future value of their investments. In addition, a wide variety of institutional money managers wish to demonstrate to their clients, including those who prefer “green” or “sustainable” investments, that they are allocating capital appropriately.
However, the quality of the transformational information available to investors, companies and governments is far from what it should be. Each constituency is responsible for this matter. Governments have been inconsistent in their approach to climate-related regulation. Companies were reluctant to make forward-looking statements; and investors have been adopting simplistic rules to classify companies as “green” or not.
Fortunately, this framework leverages an incredibly powerful tool: the information, insights, and perspectives from thousands of companies on their climate compliance plans.
For some companies, their transformation would require very few adjustments. For others, such as airlines and utilities, transformation may not be possible without fundamental changes in their business and the market in general, including, for example, developing a market for carbon credits.
This type of company-specific, forward-looking information, focused on a common future goal, is exactly what investors should want when allocating capital over the long term. It answers the key question: does the company have a credible strategy to adapt to and perform in the expected future commercial and regulatory environment?
Compare this approach to a rigid, metrics-based disclosure framework. In some industries in which climate effects have been taken into account for some time – think of property insurers – certain indicators can clearly lead to insights. However, finding universal metrics in our diverse economy is analogous to taking a long journey down the wrong end of the telescope.
Metrics are legitimate and can be included in the approach we advocate and should not be abandoned, but like financial statements, they provide limited forward-looking information.
For investors, it is more important how companies take on the costs, risks and opportunities of climate change and the associated regulation, just as the expected future profits are more important than past performance.
Access to this information also provides an informed, cross-sectoral basis for assessing whether and how the emerging global goal of 2050 can be achieved (and which countries, companies and individuals will bear the costs and benefit from the benefits) – questions from governments, Investors and companies should keep asking.
Adoption of this disclosure framework will, of course, raise questions of interpretation and implementation, including the extent to which companies would be legally responsible for their Strategy 2050 disclosures.
To address concerns about unjustified legal action in US courts, this disclosure should be kept in a safe haven that provides special protection for good faith estimates and assumptions and liability for willful fraud standards.
We should initiate a fundamental change in collective, predictive disclosure and not play with company-specific “gotcha”. With this in mind, and in order to minimize the potential for unfair competitive advantages and enforcement asymmetries that have undermined similar global regulatory efforts, these frameworks must be resolutely and simultaneously adopted and enforced.
The right framework
Regulating a global problem requires joint implementation to avoid regulatory arbitrage and corrosive industrial policy. It is important that this framework can be adopted promptly and consistently, as opposed to a metrics-specific framework, which would require extensive cross-border analysis and debate and could be out of date for a variety of reasons prior to implementation.
This framework not only reflects the fundamental characteristics of the underlying theme – a multi-year, dynamic, market-driven transition – but also provides fertile ground for virtuous dynamism.
With this information, investors are more likely to identify attractive investment opportunities more quickly, which in turn prompts companies to provide more information (to attract more capital) and encourage innovation (think carbon capture).
In a broader sense, this dynamic can lead to a better match between informed regulatory policy and company value. In other words, an improved convergence of values and values.
Jay Clayton, a CNBC employee, served as the chairman of the SEC from 2017 to 2020. Prior to joining the Commission, Clayton was a partner at Sullivan & Cromwell LLP, where he served on the firm’s management committee and co-headed the firm’s Corporate Practice. From 2009 to 2017 he was a Lecturer in Law and Associate Professor at the University of Pennsylvania Law School.
Mark Wiseman is a Canadian investment manager and business executive, and an industry leading expert in alternative and active equity investing. Until last year, Wiseman was Senior Managing Director at BlackRock and Chairman of BlackRock’s Global Investment Committee. Prior to joining BlackRock in 2016, he was President and CEO of the Canada Pension Plan Investment Board (CPPIB).