Product, Service & Design Innovation
SASB Issues Guidelines for Disclosure of Risks for Non-Renewable Resources Sector

When it comes to addressing climate change, many companies may ask, “How much will it cost to change the way of doing business?” The real question, however, is “What is the cost of doing nothing at all?”

Last week, a bipartisan group released Risky Business: The Economic Risks of Climate Change in the United States, a report that addresses this very question, and serves as a call to action for both the private and public sectors. Among its key findings:

  • Within the next 15 years, higher sea levels combined with storm surge will likely increase the average cost of coastal storms along the Eastern Seaboard and the Gulf of Mexico by $2 billion to $3.5 billion.
  • Without adaptation, some Midwestern and Southern counties could see a decline in yields of more than 10 percent over the next 5 to 25 years should they continue to sow corn, wheat, soy and cotton, with a 1-in-20 chance of yield losses of these crops of more than 20 percent.
  • Greenhouse gas-driven changes in temperature will likely necessitate the construction of up to 95 gigawatts of new power generation capacity over the next 5 to 25 years — costing residential and commercial ratepayers up to $12 billion per year.

SASB agrees with the report’s authors that, while the scenarios are alarming, businesses and policymakers have it within their powers to keep them from ever becoming a reality — but action is needed now. And with the right information, investors can play a key role in ensuring that their investments go toward companies that are working to reverse trends, rather than exacerbate them.

At a news conference in New York yesterday, former Treasury Secretary Robert E. Rubin stated: “I believe that investors should insist that companies disclose their risks, including the value of assets that could be stranded.”

In fact, many companies have been disclosing data on activities related to greenhouse gas emissions, as well as risks posed by the effects of climate change, although much of the language is boiler plate. We need standardized disclosure that enables comparability and better performance. Last week, SASB issued standards for eight industries in the Non-Renewable Resources sector, which is the sector that has the most potential to reverse trends found in the report.

To take a broader view than the Non-Renewable Resources standards, SASB addresses climate change in a few ways. First, we identify the industries where climate change is material (either from an emissions or vulnerability perspective), so that portfolios can be addressed in terms of climate risk and assets allocated accordingly. Second, we identify industries where there are opportunities associated with climate change (via the Sustainable Industry Classification System, SICS). And third, we translate climate change into actionable, industry-specific metrics by which companies and investors can benchmark and gauge progress.

Extractive industries face many challenges, at a time when resources are becoming scarcer and demand is growing greater. They teeter between discovery and depletion, but how long can that continue before the latter outweighs the former? Non-renewable resource fuels remain the primary source of all power generated in the world. This sector literally and figuratively fuels our economy. But every day, we see the growing challenges brought on by a new era – one in which pressures such as climate change, resource scarcity, volatile energy prices and population growth are shifting the rules of the game. In order to remain a competitive and successful player, this means the Non-Renewable Resources sector needs to shift right along with it. This means innovation — innovating on material issues represent the greatest chances for achieving competitive advantage and gaining market share.

Now, more than ever, this sector has an opportunity to not only build investor confidence and focus on material issues that create long-term wealth, but address some of the world’s greatest challenges in doing so.

We need only look to the crucial Risky Business report to know what the alternative is.

This post first appeared on the SASB blog on June 25, 2014.

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