Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
Ceres Managing Director Steve Rothstein discusses ways that climate-related risks could be identified and disclosed, to help investors make better decisions.
July 27, 2023 – By Simon Erickson
Climate change has been a hot topic for several decades (and yes, pun intended). But are companies and their investors taking it as seriously as they should be?
There’s a possibility that corporations, investors, banks, and insurers haven’t sufficiently been addressing the climate-related risks that lurk within their balance sheets and business models.
That goes firstly for physical risks. There are climate-related wildfires, floods, or droughts that could cause significant damage to facilities or antiquated equipment.
There’s also market-based risks associated with transitions in technology. An example is staying on top of the transition from internal combustion engines to electric vehicles. New vehicle fan belts and spark plugs aren’t selling quite as well as they used to.
And finally, there are potential litigation risks. There are financial penalties associated with failing to comply with regulations.
All of these are risks that face companies every year. How should forward-thinking investors react to them?
To answer that question, we’ve brought in an expert. 7investing CEO Simon Erickson recently spoke with Steven Rothstein, who is the Managing Director for the Ceres Accelerator for Sustainable Capital Markets. Steve and his team are helping a variety of stakeholders make better investing decisions with the ultimate goal of enabling a net zero economy.
In the first part of the conversation, Steve discusses the global regulatory framework and the disclosure rules for developed countries, and also explains how proactively addressing climate risks can protect many companies from the $165 billion of economic losses due to things like floods, fires, and tornadoes. 92% of the Fortune 500 are voluntarily disclosing the results of their climate-related initiatives. There are no mandatory disclosure laws in the United States, although it’s being considered by the SEC.
A climate-related “scorecard” could be beneficial for investors as well, which could help investors identify the most climate-progressive companies in the market who could be less-exposed to unexpected lurking landmines. In the final segment of the show, Steve describes how his company has just released its most recent Climate Risk Scorecard on ceres.org.
Don’t miss out on future conversations like this! 7investing will be publishing upcoming interviews with the CEOs of PubMatic, Rocket Lab, and more. Join 7investing’s free email list to get our podcasts and investing insights delivered directly to your Inbox.
Simon Erickson 00:02
Hello, everyone and welcome to today’s edition of our 7investing podcast where it’s our mission to empower you to invest in your future. You can learn more about our long term investing approach and actually see our actual stock recommendations for just $1 for your first week at 7investing.com/subscribe. My name is Simon Erickson. Today we’re going to be chatting about climate change. It’s a hot topic, it’s a political topic, and it’s one that has implications for investors. I’m very excited to welcome Stephen Rothstein to the program today. Steve is the managing director for the Ceres accelerator, joining me from his office up in Massachusetts, Steven, welcome to 7investing podcast. Glad to have you here today.
Steve Rothstein 00:41
Thank you, Simon, it’s great to be with you and your listeners.
Simon Erickson 00:44
Steve, I’m going to read the description of your company and what you all do. And maybe you can break that down in layman’s terms for me, but you are the managing director for the Ceres accelerator and sustainable capital markets. You’re engaging financial regulators, banks and other financial institutions, insurers, investors, corporate boards and policymakers to address climate as a systemic financial risk. That’s quite a mouthful. Can you break it down for me the goals of your organization and how you got into this?
Steve Rothstein 01:11
Sure. So market actors, investors, banks, insurers, their job is to think about risks and opportunities in their business. We feel that market actors and regulators have not been sufficiently thinking about the climate risks and opportunities. There is, for example, if you look at balance sheets of the businesses today, there is more risk on corporate balance sheets because of climate risk today than there was in a way because it’s subprime housing, more risk. There’s a lot that’s being done there. Hundreds and hundreds and hundreds of companies doing great work, trying to, again, not just as good for the environment, because it’s good for their bottom line. It’s good. Their employees want it their investors are wanting it. And there’s a lot that regulators are doing. Just a few days ago, we released a scorecard of federal financial regulators like the Federal Reserve and SEC, but what they’re doing on these issues. So we think that fundamentally, climate risk is financial risk, financial risk is climate risk. And we want all actors both in the private and public sector to address that.
Simon Erickson 02:21
I do want to talk a little bit about that scorecard in a minute, I want to talk about kind of the voluntary actions and the programs that larger corporations kind of have in place for this. But first let’s can we dig a little bit deeper into what climate risk means? How do you quantify that as that litigation is that potential lawsuits? What are the risks that are sitting on these companies that we’re not maybe not paying enough attention to right now?
Steve Rothstein 02:41
So there’s three things first is physical risk, fires, floods, droughts. Just last week, there were enormous rains in the northeast, recently, there has been flooding in other parts, or there’s been hurricanes or not enough rain so that businesses can’t hook up their plants. So for example, West, in many states, there are companies that can’t get a building permit because they can’t get it waterproof. Now, is that a business risk? Absolutely. Is it a climate risk? Absolutely. So physical risk issues is group one. Second is transition risk. The big automobile companies are all converting to EVs. That means there are hundreds of companies selling fan belts and spark plugs and other things that go in internal combustion engines that won’t be sold in a decade or so. So how are those companies? So transition of the economy? Third, are litigation or regulatory risks as well. So there are a variety of these risks. And depending on your perspective of both climate regulation, changes in policy, it can affect you know, how much literally trillions of dollars we’re talking about?
Simon Erickson 03:59
Let’s double click on that, well, let’s talk about the regulatory risks. And I’m certain that it’s different depending on where you are. And whether you’re a power provider in California or you’re an oil and gas provider in Norway, there’s certainly our regulatory regime regulations you need to abide by I believe that you follow most closely the United States and Europe. Can you talk a little bit about the framework that’s generally in place that companies have to follow by the letter of the law?
Steve Rothstein 04:25
So first is there are many countries around the world that have said in their policy, the G20, for example. That climate risk is financial risk. And their regulators, the equivalent of our Federal Reserve and SEC have instituted rules, in some case, their disclosure rules, just saying you have to disclose what you’re doing in others that affects actual actions that they’re doing as part of that. So there’s a variety of those. And just the end of June, a group called the International sustainability standards board came out with a draft rule that that there are now going to countries that could be in the next several years 100 – 150 companies may have countries have implemented that. So there are many countries that are further ahead of us. And the regulatory issues are both risks and opportunities. Meaning if you’re a leading company, and you’re already disclosing, then having a disclosure rule will give you a competitive advantage. So all of these things are risks and opportunities. Climate is a risk. You know, we had no, I said, the federal government said that we had $165 billion of economic loss last year, because of floods, fires, tornadoes, things. Like that 165 billion that’s grown over the decades. On the other side, we have opportunities, like the inflation Reduction Act and other things that are stimulating the market. And today, this year, for the first time, banks are lending more money in renewables than they were in fossil fuel. So there’s a note there’s literally trillions of dollars of growth opportunities in those areas.
Simon Erickson 06:02
And how are the report cards being graded? Who is who’s keeping score, who’s actually doing the measurements? How are companies disclosing these things to make sure they are complying with those regulations.
Steve Rothstein 06:14
So right now, 92% of the largest company, fortune 500, have some kind of climate disclosure. But they are voluntary systems. So it’s somewhat of an apples and oranges, they may not all be comparing the same things. So the Securities Exchange Commission is considering and they got 15,000 comments, overwhelming support, but not unanimous abroad feeling about a mandatory climate disclosure. So right now, there is no consistent climate disclosure for companies in the United States, across sector. There is for insurance or for some other sectors. There are in many other countries in Europe, UK, other places where they do have mandatory disclosure now. But that’s really important. And we fundamentally believe series believes in the free market, but the market only works is good information. So if I’m a customer, or if I want to be an employee or an investor, I want to get to know what my the company that I want to work for or invest in or something buy products from is doing on climate issues.
Simon Erickson 07:16
That’s super important for us, it would be right up there with a P E ratio or the revenue or earnings growth of a company right alongside that may be how its scorecard looks in, in concerning climate related risks. One of your projects you have is what you’re calling the freedom to invest responsibly, which would actually be to introduce some of those legit legislative requirements in certain states and in Congress, how are you all pursuing this? How are you going about this?
Steve Rothstein 07:47
So there is in some places, an anti ESG message where some legislators are saying that, that they’re passing bills or talking about legislation that would restrict the market, we fundamentally believe in the marketplace, as I said, and that that investors, whether it be an individual thinking about their 401 K, or an institutional investor with billions, or trillions, or a company, they know what’s best if they have good information. And that they should have the right and responsibility to invest and think about the risks. But as the inflation pandemic, what’s happening in the Ukraine, or climate and the opportunity, we oppose legislation that would ban that would block that would interfere with the marketplace. So that’s on one piece of it. But then we also working with regulators to institute more rules that would share more information. Like the SEC on climate disclosure, again, because that’s a financial risk. Just as the SEC is now in its 90th anniversary, by the way, had a decades ago, they started financial reporting. So you anyone can go online, and look at their audited statements from the public companies. But you can’t do that in climate. And it’s projected to have enormous risks. So we’re working on those areas. We also just published a scorecard of federal financial regulators and how they’re making progress.
Simon Erickson 09:12
Are there certain sectors where this is super important, Stephen? Are there certain industries, whether it’s power production, whether it’s chemicals, whether it’s oil and gas, whatever? Are there are certain sectors of the economy that are really going to move the needle on the efforts you’re trying to make there?
Steve Rothstein 09:27
Yeah, great, great question. Thank you. Great question. Um, so there’s a group the sustainability SASB sustainability board. They’ve identified that 72 of 79 sectors are dramatically affected by climate. But clearly the ones that you mentioned in terms of oil and gas, electric utilities, heavy industry, agriculture, real estate, those have the biggest impact. So they almost all do, but those have the biggest ones.
Simon Erickson 09:57
And knowing that it is still kind of this voluntary self disclosure. You know, there’s not a huge overarching regulation for a lot of these disclosures. Is there a way that as investors, we can size up companies that are doing that? Well, is there a way to know who are the students and who are the F students in the class when it comes to climate risks?
Steve Rothstein 10:15
So you can go online. And first is you if these companies are in Europe or in Asia, they’re published reports for that, in terms of the US, with a few exceptions, like the insurance industry and stuff like that, there is no way to look at them comparatively. But if you go online and dig around, you can usually find a climate report on their website or in some of their filings. And then you need to compare them because they may be in different formats, or one might be looking at water use, and one might be looking at CO2 use or things like that. So it’s hard to compare those mean, as a general rule, more of the technology companies are investing in more of these. But then the companies that are using natural resources, like a lot of food companies that use biodiversity and water and farmland, they understand the future. I mean, we’re running out of water, we either have too much water in some places or not enough. So they’re working on those as well. So there are more and more companies need some great examples and great leadership, the marketplace is moving. Also investors are moving. About 60 investors representing $60 trillion of assets have made Net Zero commitments. Some are happening now. Some are going to happen over time. So those are those are also moving in exciting ways.
Simon Erickson 11:33
Yeah, it’s certainly interesting. Something we’ve seen, firsthand here has been corporate data centers or cloud data centers. Yes, computing required for the servers for these is astronomical, at least compared to what it was 10 years ago. And so many of them are actually, you know, addressing it in a responsible manner of Yeah, we want power efficiency, not just because it saves on operating costs on the bottom line, but it’s also got environmental impacts for this as well. Certainly requirement. Yeah, yes, yes, exactly. And in addition to the company, Steven, you know, I know that you also have just released the what you’re calling the third climate risk scorecard, which is not covering the companies, but the regulators, the SEC, the Fed the Treasury, the others, and kind of the climate related financial risks that they’re trying to regulate in the first place. Can you tell us a little bit about that effort, what you want to achieve from it? Sure.
Steve Rothstein 12:22
So in the United States, some countries have one regulator, like a fed that does everything they do these banking securities, sec work, insurance, etc, we have many different regulators. So we have a new scorecard out, it’s on our website, ceres.org. And if you go to the financial regulator, and it looks at the 10 financial regulators and how they’re doing, and it’s all very fact based. What we’ve identified is in the last is our third annual one, that in the last year, they’ve done 100 specific actions. Again, these are not they don’t do them, because they’re good for the environment, the Federal Reserve is not their mission. Their mission is the safety and soundness of banks. So this is all a recognition that climate is a significant risk factor for banks, and they need to consider it. So there’s great progress made, not enough, not as much as other countries, and to be honest, not as much as what Mother Nature is requiring.
Simon Erickson 13:20
And I think my final question, is the other countries piece of that the international question, right? You mentioned the physical risks, the transition risks, the regulatory risks, certainly those are at least homecourt bias, easy for us to understand, in America and Europe, in developed markets, when we start looking at investing internationally, you know, the countries like China developed markets and Africa, places like this. Are they raising the bar also, on their regulatory agencies? Are they also addressing climate in the same way that the US and Europe are? Or do you think that there’s still quite a gap there? I’m catching up with with disclosures and things like that.
Steve Rothstein 13:54
There’s a wide range, there are countries that are way ahead of us. You know, some in Europe started climate disclosure, for example, in 2016. So we, you know, our country’s debating it now. Others have been doing it for eight or nine, seven or eight years. And then there are others that are further behind. But if you look at the the arc of history, we are moving to more recognition that climate is a financial risk. And like any minute business management, you can’t manage a problem if you can’t measure a problem. And so there’s more agreement about having consistent way to disclose this.
Simon Erickson 14:31
Well, thanks again, Stephen. Once again, Steven Rothstein, the managing director of the series accelerator for sustainable capital markets. Joining us from Massachusetts really appreciate you being a part of the podcast today. Steven.
Steve Rothstein 14:41
Thank you so much. And again, for you or any of your listeners, if they have questions, they go to ceres.org. There’s a lot information there and love to talk to anybody.
Simon Erickson 14:51
Great disclosure, a great topic. Thanks very much for the time, Steven. And thanks, everybody for listening to this edition of our 7investing podcast. We’re here to empower you to invest in your future. We are 7investing. Have a great week.
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
Anirban and Matthew were joined by Alex Morris, creator of the TSOH Investment Research Service, to look at seven former market darlings that have taken severe dives from...
On episode 5 of No Limit, Krzysztof won’t let politics stand in the way of a good discussion - among many other topics!