Doctor’s Orders for Mother Earth: Talk Less, Act More
By Carol Nolan Drake, J.D., Skytop Contributor / December 14th, 2021
Carol is the CEO and Founder of Carlow Consulting, LLC, a company she created in January 2017, following a senior position with an institutional investor handling corporate governance and external relations. Before this role, Carol served in leadership positions for three Ohio governors, with appointments to the Cabinet and several boards and commissions, including as a trustee for a public pension fund. Carol is also the Global Governance and Stewardship Manager for ICGN as of October 2021.
As an attorney, Carol worked in private practice and as an assistant attorney for the city of Columbus. She served five years on the Board of the Council of Institutional Investors (CII). Carol was the co-chair of the ICGN Shareholder Responsibilities Committee (SHREC) under which the Committee revised the Diversity and Share Lending Guidelines.
Carol has published several articles on corporate governance, ESG and diversity, including chapters in The Handbook of Board Governance, Second Edition. She also writes about federal policy and the intersection between effective company reporting and investor expectations. Carol is a frequent speaker on governance, diversity initiatives and investor stewardship. She holds a law degree from the Claude Pettit College of Law.
“Perhaps he knew, as I did not, that the Earth was made round so that we would not see too far down the road.” ― Isak Dinesen, “Out of Africa”
For Things to Stay the Same, Things Must Change
Every year I dutifully make an appointment to see my doctor for a check-up. My doctor, whom I call Dr. Terre, takes my temperature and blood pressure, orders blood work and sits down to have the “talk.” The talk is what I, or just about everyone else, dreads. She reminds me that I am another year older and while I am in good health now, I need to think about the future. I can’t see too far ahead, but I know, if I hope to live to the year 2030 or even 2050, there are a few things that I will need to change.
During the 26th United Nations Climate Change Conference of the Parties (COP26) in Glasgow, that concluded on November 12, 2021, it occurred to me that the same advice should be given for Mother Earth. After all, the National Geographic Society believes that Earth is estimated to be 4.54 billion years old, plus or minus about 50 million years. Over the course of those billion years, she has given us the wealth of her oceans, mountains, and plains. In recent years, we have come to realize that these vast resources are not infinite.
My point: If we want to keep living the way we do today then things will have to change. Consider the slight twist on the quote from “The Leopard” by Giuseppe di Lampedusa: “If you want things to stay the same, then things will have to change.”
Less Talk, More Action Needed
Over the course of two weeks, 20,000 delegates attended COP26, representing 195 countries, organizations, and companies. Many of these countries issued statements on their plans to help limit global warming below 1.5 degrees Celsius. As a part of this they expressed support for the reduction of greenhouse gas emissions by 2030 and committed to net-zero carbon emissions by 2050. There were high expectations for creating identifiable targets and measurements to track progress, as the danger of failing to address climate change becomes more real.
Prior to, during and after the Summit, several international organizations released statements and reports identifying the cost of climate change as a significant concern for vulnerable populations and financial stability in the global markets. These were the statements that resonated because they cut to the chase of the climate change discussion and offered actionable steps, road maps for tracking progress and effectively communicated the reality that none of this would be easy. They understood that the “talk” would need to end and progress would need to be made. Keep in mind that the year 2030 is less than nine years away.
Considerations on Earth’s Temperature
For anyone that struggles with the Fahrenheit to Celsius temperature conversions, a human’s temperature is generally in the range of 98.6o F, which would be 37o C. Celsius to Fahrenheit conversion | °C to °F (metric-conversions.org) A change by adding 1.5o C would mean that an individual would have a temperature of 101.3o, which would be considered a fever. Anything higher could be life-threatening. Fever – Symptoms and causes – Mayo Clinic.
The effort to limit global warming to no more than 1.5o C is based on research to establish an evidentiary trail and determine a path forward to slow down the warming trend. The National Aeronautics and Space Administration (NASA) is one agency that has studied climate science and “model and predict ocean health, heat waves, wildfires, hurricanes, floods, and droughts.” In one research study, NASA reported:
The planet’s average surface temperature has risen about 2.12 degrees Fahrenheit (1.18 degrees Celsius) since the late 19th century, a change driven largely by increased carbon dioxide emissions into the atmosphere and other human activities.4 Most of the warming occurred in the past 40 years, with the seven most recent years being the warmest. The years 2016 and 2020 are tied for the warmest year on record. 5 Evidence | Facts – Climate Change: Vital Signs of the Planet (nasa.gov)
Out of COP26 came “nearly 200 countries agreeing [with] the Glasgow Climate Pact to keep
1.5 C alive and finalize the outstanding elements of the Paris Agreement. The Glasgow Climate Pact, combined with increased ambition and action from countries, means that 1.5 C remains in sight, but it will only be delivered with concerted and immediate global efforts.” COP26 keeps 1.5C alive and finalises Paris Agreement – UN Climate Change Conference (COP26) at the SEC – Glasgow 2021 (ukcop26.org)
A second announcement was issued from the International Financial Reporting Standards (IFRS), which listed “three significant developments to provide the global financial markets with high-quality disclosures on climate and other sustainability issues:
The formation of a new International Sustainability Standards Board (ISSB) to develop—in the public interest—a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs;
A commitment by leading investor-focused sustainability disclosure organizations to consolidate into the new board. The IFRS Foundation will complete consolidation of the Climate Disclosure Standards Board (CDSB—an initiative of CDP) and the Value Reporting Foundation (VRF—which houses the Integrated Reporting Framework and the SASB Standards) by June 2022;
The publication of prototype climate and general disclosure requirements developed by the Technical Readiness Working Group (TRWG), a group formed by the IFRS Foundation Trustees to undertake preparatory work for the ISSB. These prototypes are the result of six months of joint work by representatives of the CDSB, the International Accounting Standards Board (IASB), the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), the VRF and the World Economic Forum (Forum), supported by the International Organization of Securities Commissions (IOSCO) and its Technical Expert Group of securities regulators. The TRWG has consolidated key aspects of these organizations’ content into an enhanced, unified set of recommendations for consideration by the ISSB.” IFRS – IFRS Foundation announces International Sustainability Standards Board, consolidation with CDSB and VRF, and publication of prototype disclosure requirements.
The announcement was significant news. A prototype for climate and general disclosure requirements could bring about a comparable and auditable global standard for companies well before 2030. While over 140 countries have agreed to IFRS standards, this could be an opportunity for them to adopt new climate standards, thereby providing corporate reporting on a nearly universal platform.
Working Collectively is Key to Improving the Earth’s Vital Signs
The signs of climate risk and its impact on global financial markets have concerned standard setters and regulators, as exposure within various sectors showed higher systemic risks. Questions on how to address a patchwork of codes, regulations and standards became part of vital discussions. Indeed, colleagues, Jon Lukomnik and James P. Hawley, in their new book, ”Moving Beyond Modern Portfolio Theory: Investing That Matters”(Routledge; 2021) have pointed out that “some of the largest investors in the world focus not on picking stocks or bonds, but on mitigating systemic risks, such as climate change and a lack of gender diversity, thereby improving the risk/return of the market as a whole….”
On April 12, 2021, the Sustainability Standards Board (SASB) (pre-merger with IIRC to create the Value Reporting Foundation) released a Technical Bulletin, which noted the interrelation of 68 out of 77 industries (88%) at this stage that are impacted by climate risk:
SASB research demonstrates that 68 out of 77 industries in SASB’s Sustainable Industry Classification System (SICS™)14 are significantly affected in some way by climate risk. This equates to US $45.2 trillion, or 89 percent, of the market capitalization of the S&P Global 120015 and represents a systematic risk that cannot be diversified away. As a result, investors must employ other strategies to manage climate risk, such as balancing exposures through sector allocation, focusing exposures on best-in class securities, and actively engaging with portfolio companies on key climate-related factors to encourage improved performance. (Climate-Risk-Technical-Bulletin2021-042821.pdf (sasb.org), p.8) (Emphasis added)
The Bulletin included a series of maps and tables to assist with mapping out risks and impacts:
Climate Risk Map, in which the presence of “three primary types of climate risk (physical, transition, and regulatory risk) in each of SASB’s 77 SICS industries” are mapped (pp. 14-15);
Financial Impact Channel Map, which “illustrates the exposure of each of SASB’s 77 SICS industries to climate-related impacts through each financial impact channel (i.e., balance sheet, income statement, and risk profile),” (p. 17-18) and
Climate Metrics Table, a comprehensive table which lists the SASB Climate-related Industry Disclosure Topic, Accounting Metric, Accounting Metric Category, Accounting Metric Unit of Measurement by Industry. It includes an overlay of Physical Effects, Transition to a Low Carbon, Resilient Economy and Regulatory Risk (pp. 24-40).
In another pre-COP26 announcement, the Financial Stability Oversight Council (FSOC) issued its report on October 21, 2021, in which it said:
Investors, market participants, and regulators need better data and information, including enhanced and transparent disclosures, to assess climate-related financial risks and their potential effects on the financial system. This information will be used to help gauge risks to individual institutions and markets and to financial stability.
Through these actions, financial regulators can both promote the resilience of the financial system and help it support an orderly, economy-wide transition toward the goal of net-zero emissions.
The adverse effects of climate change are likely to be disproportionately borne by financially vulnerable communities, including low-income communities, communities of color, and Native-American communities.10 These communities may also have fewer resources to recover from, or adapt to, adverse impacts. Certain actions to address climate-related financial risks could impact financially vulnerable communities in the form of higher insurance and credit costs or the inability to obtain insurance or credit. The Council acknowledges that addressing the impacts of climate change on disadvantaged communities will require thoughtful and balanced policy responses developed through a coordinated approach involving stakeholders across the public and private sectors. (FSOC Report on Climate-Related Financial Risk (treasury.gov), p.7).
The FSOC report contained four recommendations, including specific steps under each recommendation: 1) Building capacity and expanding efforts to address climate-related financial risks; 2) Filling climate-related data and methodological gaps; 3) Enhancing public climate-related disclosures; and 4) Assessing and mitigating climate-related risks that could threaten the stability of the financial system. (pp. 5-9)
On October 20, 2021, the International Corporate Governance Network (ICGN) released the “ICGN Statement of Shared Climate Change Responsibilities to UN COP 26.” ICGN’s Statement “sets out priorities for companies, investors, auditors, and governments to clearly identify challenges, determine solutions, and implement assertive action.”
In her statement, Kerrie Waring, CEO, linked the actions of these four institutions, which have significant reliance on each other, to a combined path forward. She said:
There is now global consensus among politicians, regulators, capital market actors and society in general that climate change presents a systemic threat to the future of humanity on a magnitude of importance like no other. It will eclipse the current COVID crisis in terms of testing our ability to quickly react, mitigate and manage the dire effects.
As we advance towards a just transition, strong corporate governance and investor stewardship, supported by common sustainability reporting standards and reporting, will be critical. Corporate boards, management, investors, the auditing profession, standard setters and others have unique responsibilities to clearly identify challenges, determine solutions, and implement assertive action. This will help ensure that present and future generations are not unfairly burdened with the negative social, ecological, political, economic, and financial consequences that result from the climate and biodiversity crises. ICGN Statement on COP 26_ENG_Oct_20_2021.pdf
On November 11, 2021, 141 leaders committed to a declaration of forest and land use, to “working collectively to halt and reverse forest loss and land degradation by 2030 while delivering sustainable development and promoting an inclusive rural transformation.” The endorsers have oversight of 90.94% of the forest area in the world. While there are six recommendations, the fifth one calls on a coordinated approach:
Reaffirm international financial commitments and significantly increase finance and investment from a wide variety of public and private sources, while also improving its effectiveness and accessibility, to enable sustainable agriculture, sustainable forest management, forest conservation and restoration, and support for Indigenous Peoples and local communities[.] Glasgow Leaders’ Declaration on Forests and Land Use – UN Climate Change Conference (COP26) at the SEC – Glasgow 2021 (ukcop26.org)
The considerations of vulnerable populations, biodiversity, deforestation, water and land usage will support a just and vital transition.
Diagnosis and Cure for the Earth’s Worsening Condition
Unfortunately, there is no easy diagnosis for our Earth’s health. There appears to be a remedy, however, if we choose to follow it. COP26 provided an updated prescription and treatment plan for us to follow.
Perhaps the world is round so we can’t see too far ahead. If we could peer into the year 2030 or beyond to 2050, will we see that we followed these recommendations? Or have we succumbed to a chronic condition that was avoidable?
As E.F. Schumacher said, “Infinite growth of material consumption in a finite world is an impossibility.” In a similar way, my Dr. Terre helped me understand that a focus on long-term outcomes can significantly improve the quality my life. With this incentive, we should have the motivation to unearth our collective future.
Follow COP26 news and announcements here: LATEST NEWS – UN Climate Change Conference (COP26) at the SEC – Glasgow 2021 (ukcop26.org)