In response to a peice by Kristina Wyatt

Piece by Kristina Wyatt

Since the introduction of Environmental, Social, and Governance principles to the business world, there has been a persistent counter-narrative that climate change has only a notional connection to financial risks and successes. Some opponents of ESG-driven business strategy claim that the pursuit of environmentally responsible behavior on the one hand, and profits on the other, are at odds with each other. This view found voice at the national level in the US earlier this year with the passage of a bill that would have rescinded a Department of Labor rule allowing private employer-sponsored retirement plan fiduciaries to consider ESG factors in making investment decisions. According to Senator Mike Braum, the DOL rule that the legislation targeted “encourage[s] fiduciaries to make decisions with a lower rate of return for purely ideological reasons.” The bill was vetoed by President Biden in March of 2023, leaving the DOL rule intact. This was welcome news because the legislation would have interfered with the ability of pension plan trustees to fully evaluate the risks associated with retirement investments, serving to ultimately inhibit profitability, not aid it. 

According to the Task Force on Climate-related Financial Disclosures (TCFD), the risks associated with climate change can be separated into two groups: physical and transitional. Physical risks result from direct, physical impacts of climate change, and can be identified as either acute (“sudden, event-driven climate impacts”) or chronic (“manifesting more gradually or persistently”). For example, hurricane exposure is an acute risk, and drought or sea level rise are chronic risks. Transitional risks are characterized as changes as a result of the transition to a lower carbon economy.

Segregation of Duties – Mitigate Risk

By considering physical and transitional climate risks and opportunities, investors are able to evaluate a company’s prospects not only for financial success, but long-term resilience. The stigmatization of climate change considerations acts as a distraction from the legitimate investment advantages that can be found by analyzing and acting upon ESG factors. The passage of an anti-ESG piece of legislation in the US, though it was ultimately vetoed, is in stark contrast to Sweden’s banning non-ESG funds from government pension investment. To respond to changing environmental conditions, we need to embrace a narrative that enables companies, investors, and other decision-makers to make decisions on the basis of all material, relevant success factors. 

© 2023 Clear Strategy Co.

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