GlobalData has been tracking the emergence of a market-based feedback loop in which stakeholder pressure drives substantial corporate action on climate change. A key element is growing recognition among investors that climate change threatens widespread disruption of businesses and the financial system overall.

Investors representing almost $1tn in assets warned in the summer of 2020 that regulators must “explicitly integrate climate change across your mandates” to avoid “significant disruptive consequences on asset valuations” due to the “systemic threat” that climate change poses to financial markets and the economy.

Now, the Biden administration has responded by saying to the financial community, in effect, “We hear you.” It has ordered government agencies to brace for financial shocks as worsening climate impacts – wildfires, floods, storms, and more – escalate risks to investors, businesses, and consumers.

Feedback loop impacts businesses and investors

A recent article in the New York Times identified two major types of climate-related financial risk: the impact on businesses and investors as climate-related disasters damage crops, buildings, and supply chains, and the potential for a steep drop in the value of companies that depend on fossil fuels as markets shift toward wind, solar, and other forms of energy that do not produce greenhouse gases.

“Our modern financial system was built on the assumption that the climate was stable,” Brian Deese, head of President Biden’s National Economic Council, told reporters in a call reported by the Times. “It’s clear that we no longer live in such a world.”

Biden’s order directs officials to report the risks from climate change to federal assets and tax revenue. It also tells the Department of Labor to find ways to protect pensions and says the government should consider requiring companies with which it does business to disclose their greenhouse gas emissions.

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By GlobalData

Disclosure is critical because it makes climate risks evident to investors, customers, and employees, who may drive companies to modify their behavior, according to Mindy Lubber, CEO and president of Ceres, a nonprofit that works with investors to address the impacts of climate change.

“Once they go public with what their risks are, they’re going to start mitigating their own risks,” the Times quoted Lubber as saying.

Left unstated is that companies that mitigate their climate risks are not necessarily acting out of altruism, though their actions may benefit others. They are acting out of self-interest — to curry favor with investors, customers, employees, and perhaps communities and regulators as well. They are seeking a reputational and ultimately competitive advantage or aiming to at least avoid reputational and competitive harm.

This is the essence of the nascent climate action feedback loop: self-interest drives positive climate action, stakeholders reward such action in the marketplace, and the company is incentivized to take further positive climate action.

Climate activists can boost share prices

One tiny proof point: on Wednesday (26 May), after climate activists won seats on ExxonMobil’s board of directors, the company’s shares rose more than 1% on the NYSE. Another sign: BP, which has invested in renewable energy while ExxonMobil resisted, has consistently outperformed ExxonMobil in share price over the last several years. More broadly, investment funds focused on sustainability tend to be more resilient and slightly outperform funds without that focus.

Recognizing the advantages they can achieve, hundreds of companies, including many of the world’s largest brands, are making major public commitments to slash their greenhouse gas emissions. They are using programs such as the Science-Based Targets initiative and The Climate Pledge, launched in 2019 by Amazon and its NGO partner Global Optimism.

As these companies deliver on their commitments, consumers, employees, and investors alike will have more low-carbon and net-zero-carbon options, and the climate action feedback loop will gather speed.