Are Companies Abandoning Climate Action?
Last week, Bloomberg reported that mentions of climate change and other environmental topics in corporate earnings calls have dropped by 75% since they peaked three years ago. We asked Yale SOM’s Todd Cort what the change of emphasis says about the state of corporate sustainability efforts.
The dried-out lakebed of Suesca lagoon in Suesca, Colombia, in 2021.
Does the drop in discussions of sustainability on earnings calls represent a real shift in companies’ activity, or just a change in emphasis in their public statements?
Let’s dive into the structure of an earnings call. The call usually begins with some prepared remarks by the company and then Q&A for investors. Sustainability topics tend to be strategic and not a major part of the quarterly reporting (if sustainability is a major part of your quarterly statement, that is typically not a good thing). So the prepared remarks by the company are the most common place for sustainability topics to be raised. Once you get into the Q&A it can be difficult to bring sustainability up again. So the drop in discussions on sustainability in earnings calls points predominantly to a drop in the topics being highlighted by companies in the prepared remarks.
Why are companies bringing up the strategic importance of sustainability less nowadays? One reason is because the expectations on disclosure for sustainability has been substantially complicated over the last year. First, much of the most financially material sustainability information is now disclosed under a regulatory standard in the EU, and for many large U.S. companies as a result. That process is very much in development and I am not surprised that companies are shelving strategic or future-looking statements on sustainability topics while those regulated disclosures are determined and drafted. Second, the backlash against “ESG” and “DEI” from the U.S. federal government will certainly have general counsels recommending these topics be kept out of the prepared remarks unless there is an even more compelling reason to bring them up.
Collectively, deprioritizing decarbonization is the equivalent of driving growth through credit card purchases. We are putting off the cost of our growth until later and we will pay interest as it becomes due.
What has not changed are the fundamental risks and relationship between sustainability and business success. Climate risks have not gone away. Risks from ecosystem degradation have not disappeared. Risks to business from the fraying of social cohesion (migration, inequality, conflict, etc.) have not evaporated. These risks are still relevant if not more material with each passing week. Businesses would be exceptionally short-sighted not to have these issues in mind during business planning and investors will continue to expect to hear about their strategies and management approaches going forward.
So, I think this is combination of toning down the public statements along with building a more nuanced understanding of which sustainability topics create risk and opportunity in the context of the current political and regulatory dynamics.
Do you expect a loss of momentum or even a reversal in corporate decarbonization efforts?
I do expect a loss of momentum, but not a reversal. But the underlying factor pushing back on decarbonization is not political or regulatory pressure; it is cost. Companies made big commitments to net zero emissions over the last several years. Their performance to date and information emerging from lawsuits suggests that many companies did not consider the cost implications of eliminating (and/or offsetting) greenhouse gas emissions from their own operations let alone along their value chains. The result appears to be a potentially significant amount of unfunded liability because companies could not earmark sufficient funds to cover the targets. Of course, this generalization doesn’t apply to all companies, but it applies to enough that I think we will see a slowing of decarbonization.
I don’t foresee a reversal because carbon emissions still create risk—risk if there is a cost to those emissions somewhere in the world, risk from more extreme weather, risk from ecosystem collapse, etc. So there is little sense to try to increase emissions intensity for the same economic activities.
The other big reason I do not expect a reversal is because the renewable energy “boat” has already sailed. In much of the world, distributed, green energy like solar and wind is cheaper, is more resilient to weather events, is more resilient to political upheavals and regional conflict, and is more aligned with national priorities to build out digital technologies, battery innovation, and infrastructure investments. This is not to say that oil and gas will not grow. Energy demand overall will continue to increase and so all forms of energy are on the table to meet that demand. But purposefully turning away from renewable energy would effectively be a tax on any national economy.
What are the risks to public companies of deprioritizing climate and other aspects of ESG?
Collectively, deprioritizing decarbonization is the equivalent of driving growth through credit card purchases. We are putting off the cost of our growth until later and we will pay interest as it becomes due. Climate change will create a massive drain on the global economy. The slower we decarbonize, the greater will be that drain and the sooner it will occur. This will hit every business and government on the planet. That drain will come in the form of disruptions to business, higher costs for most raw materials, reduced productivity of employees, increased regional conflict from the complex relationship of climate, food, water, migration, and regional stability, and the accelerating costs from natural disasters like hurricanes and wildfires. These are the chronic impacts that no company will avoid. But there are also acute risks that will impact unlucky companies like loss of assets to fire and flood, rising insurance costs for operations, disrupted supply chains, infrastructure disruption from droughts, etc.
Not every ESG topic is a financial risk and not every company will face the same types and severity of risks. But it is safe to say that all companies have some financial risk from ESG topics and it would behoove companies to think through what those risks are and what is the best strategy to try to avoid or mitigate those risks.
I have only spoken so far about the downside risks. But there are also huge opportunities in solving climate and other sustainability challenges. Green energy, water technology, energy security and resilience, battery technology, minerals reuse and reprocessing are vast opportunities in tomorrow’s global economy and they are also some of the most pressing sustainability challenges. Investment capital will flow to these opportunities regardless of politics. So companies also risk losing out in the future economy by deprioritizing climate and sustainability issues.