July 2, 2019 / 2:51 PM / 5 months ago

Breakingviews - UK climate disclosure needs more than a big stick

Protesters block traffic outside The Bank of England during the Extinction Rebellion protest in London, Britain April 25, 2019. REUTERS/Simon Dawson

LONDON (Reuters Breakingviews) - The UK is once again talking a good game in the battle against climate change. Fresh from committing to cut carbon emissions to net-zero by 2050 - without explaining how it would get there - the British government on Tuesday said it was considering forcing listed companies and pension funds to disclose how their activities would be hit by global warming. Such mandatory disclosure sounds tough, but might not achieve much.

Even if applied only at a national level, some sort of boot to companies’ backsides wouldn’t go amiss. According to research cited by the Network for Greening the Financial System, which comprises over 30 of the world’s central banks and supervisors, the energy sector alone faces $1 trillion to $4 trillion of losses from the transition to a low-carbon economy. Yet the Task Force on Climate-related Financial Disclosures, a voluntary regime associated with the Financial Stability Board, has so far reported slow progress. A report last September found that while a majority of corporates disclosed at least some climate-related information, few divulged useful details that would allow investors to discriminate between them.

Forcing rather than asking would deal with the refusenik minority, but what’s needed is a disclosure template that is detailed enough to be useful for investors without enabling corporates to plead commercial sensitivity. Analysts at Carbon Tracker Initiative recently mooted one in the vital sphere of oil and gas companies. They propose that oil groups divide their future projects according to the crude price at which they break even. If each one did that, investors would have a rough sense of how companies can cope in an environment where demand and prices fell, due for example to a carbon tax or a green energy revolution.

Unsurprisingly, big oil players like BP or Total have little incentive to give this type of detail, or explain how their plans comply with the Paris Agreement to restrict global warming to well below 2 degrees Celsius. But with investors increasingly on their case, there could be a significant advantage to those who are quick to adopt a robust template. Once a critical mass had signed up, refuseniks would be valued less highly than peers, giving them an incentive to change their ways. That could remove the need for mandatory disclosures in the first place.

Breakingviews

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