etween boards, managements and institutional investors are win-win-win situations. Companies benefit from the collaboration this engagement engenders among their three lead players: management, which develops the company’s long-term strategy including the environmental aspects; the board, which oversees implementation of strategy and acts as a fiduciary for shareholders; and institutional investors, which hold the board accountable for its policies and actions. Developing a solid base of stable institutional investors is in the company’s ultimate interest, as it helps stabilize stock performance and allows the company to tap deep pockets when it needs to finance future projects.
Carbon readiness and resilience is a core component of sustainability research geared to assessing the environmental, social and governance (ESG) performance of corporations. This research translates into a range of ESG ratings, rankings and indices aimed at capturing the external costs and benefits disregarded by financial accounting and reporting. Rising investor demand has fueled strong growth in the ESG information market over last two decades. Many asset managers now use sustainability analyses and ratings to manage and map their portfolios, by benchmarking issuers on various quantitative metrics.
Regardless of the approach used by investors to factor in the climate-risk exposure associated with their investee companies, carbon prices are useful metrics for governing the transition to low–carbon business models and for communicating on this transformation to shareholders and asset managers. Companies capable of demonstrating their ability to navigate and act on carbon price risks so as to effectively reduce their carbon footprints, enjoy a strategy advantage which can translate into better financial performance.