What carbon risk disclosure will (and will not) mean

Carbon risk is here. So where is carbon risk disclosure?

Whether they like it or not, U.S. companies and investors are starting to accept the reality of carbon constraints. Whether as a result of a new carbon tax, the establishment of a US carbon market, or $140 per-barrel oil sparking a free-market shift toward energy efficiency and renewable energy, the fact is clear: the things we do that emit carbon are about to get more expensive – maybe a lot more.

In practice, will the kind of disclosure we are likely to get matter? Yes, but not as you might expect. This shift will result in a significant redistribution of wealth and capital, effectively creating carbon winners and losers. It is already happening in capital markets, where private equity and venture capital is placing billions of dollars in bets on clean tech startups while established companies are greening-up to convince stakeholders they won’t become a carbon casualty.

But capitalizing on carbon requires a particularly scarce resource: reliable information about a company’s carbon risk profile – the extent to which its performance may be affected by carbon-related market or policy changes.

Carbon risk disclosure has progressed at a glacial pace until now. But the recent financial meltdown and carbon’s elevated profile in policy and investment decisions have intensified the call for more disclosure. The rules on the books already cover carbon and just need to be invoked. Companies that fail to adequately consider and disclose such risks are putting themselves at significant additional risk of significant losses and costly lawsuits.

Carbon risk disclosure will definitely yield more information, but not necessarily better information. But the mere prospect of heightened carbon disclosure requirements is forcing US companies to focus much more on, and to manage much more effectively, carbon-related risks and opportunities. Those who don’t will pay a much higher price than the price of carbon, courtesy of the market and the plaintiffs’ bar. Those with the best informed view of carbon’s long-term impact will outperform the competition and will attract more capital on better terms.

But stakeholders won’t simply be handed detailed information for make-or-break investment decisions. Investors still have to develop their own forward look incorporating what little new information companies are required to disclose. As it should be. If investors want to realize the returns from forecasting carbon correctly, they should actually have to do the work. Carbon disclosure will not provide the answers; it will just help answer some of the questions.

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