Eli Kasargod-Staub is co-founder and executive director and Jessie Giles is research director at Majority Action. This post is based on their Majority Action report. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).
In the face of a global pandemic, climate-driven hurricanes, wildfires, and other extreme weather events, and the subsequent economic crisis destroying lives, livelihoods, and property, it is clear that systemic risks are the greatest threat to global economic and financial stability. To investors’ portfolios, the systemic risk of climate change is large, material, and undiversifiable–as well as undeniable. Investors and companies have been on notice since 2018 that the global economy must nearly halve carbon emissions in the next decade and reach net-zero emissions by 2050 to have just a 50% chance of limiting global warming to 1.5°C and avoiding the worst effects of a climate catastrophe.
In order to manage these systemic portfolio risks, investors must move beyond disclosure and company-specific climate risk management frameworks, and focus on holding accountable the relatively small number of large companies whose actions are a significant driver of climate change. Unfortunately, despite some recent progress, the largest systemically important carbon emitters and enablers in the U.S.–the energy, utility, automotive, and financial services sectors–remain far behind in the urgent business transformation needed to achieve a net-zero carbon future.