Carbon Tracker recently submitted comments to the European Commission’s ongoing capital markets union (CMU) consultation.
Among other things, the CMU aims to attract new sources of non-bank capital to the markets and to increase long-term investment in sustainable infrastructure. The Commission’s consultation recognizes that a healthy CMU requires that investors have confidence in the market–Carbon Tracker argues that fostering confidence requires transparent disclosure of long-term risks such as that which climate change poses for fossil fuel companies.
Many fossil fuel companies acknowledge the reality of climate change, but contend that they will not be materially impacted by an energy transition or that society is not capable of making the necessary transformation. There are good reasons to question this belief. The poor financial performance of European utilities in recent years reflects the impacts of failing to adapt to such a transition quickly enough. Large utilities are now looking to restructure from a position of weak financials and poor credit ratings. Moreover, companies must do more than acknowledge the climate change problem, they must also recognize “the gravity of the consequences society will face if it continues on its current course, primarily because those consequences suggest the magnitude of the foreseeable mitigation response.”
Carbon Tracker also noted that “from a supervisory perspective, regulators should ensure that investors are provided with the information necessary to determine the extent to which company business plans deviate from climate-safe energy pathways.”
Indeed, the worst thing that could happen to a newly formed CMU would be to make it less transparent, thereby permitting the climate-riskiest investments to pile in. Policy-makers should not succumb to what the Governor of the Bank of England referred to as the “tragedy of horizons” by viewing these risks as too long-term to be addressed by the capital markets.