As global leaders meet in Paris to negotiate the transformation of the global energy flows into a low-carbon system, investors face new challenges and new opportunities. 1. Investment risks linked to climate change could soon be reported by public companies around the world. Mark Carney is the head of the Bank of England and Chair of the Financial Stability Board (FSB) at the G20, a group of counries with the world’s largest economies, including Canada. He announced in Paris on Friday that they will establish a Task Force on Climate-related Financial Disclosures.

This Task Force will develop guidelines for companies around the world to make consistent climate-related financial risk disclosures to their lenders, insurers, investors, and other stakeholders. This announcement from Canada’s famous former central banker came alongside Environment and Climate Change Minister Catherine McKenna’s announcement on the need to pursue a 1.5 degree warming strategy. The 1.5 degree warming target requires rapid reductions in greenhouse gas emissions. Together the two statements should be a wake-up call for Canadian companies, including our banks, who have until now been happy to treat climate change as a public relations plush toy – infinitely adjustable depending on their needs. According to Carney, the new G20 Task Force “will make recommendations for consistent company disclosures that will help financial market participants understand their climate-related risks. Access to high-quality financial information will allow market participants and policymakers to understand and better manage those risks, which are likely to grow with time.” The development of internationally coherent climate-risk disclosure standards is a boon for investors.

While it may sound boring, the resulting data reporting can have huge implications for investors because it can be used to hold company management to account on their assessment and responses (or lack thereof) to climate change commitments by all levels of government. Task Force chair Michael Bloomberg, the billionaire former Mayor of New York stressed that it is now “critical that industries and investors understand the risks posed by climate change, but currently there is too little transparency about those risks.” According to Bloomberg, increasing transparency “will help make markets more efficient, and economies more stable and resilient.” Along the way to more efficient capital markets, we are likely to see litigation by shareholders against companies who fail to honestly and transparently disclose how they plan to adapt to a lower-carbon world. In addition to helping investors understand investment risks linked to the low-carbon energy transition, the Task Force’s work will help identify those companies who are making the energy transition happen. More complete information will mean that investors get both better data on risk, and better insights into future opportunities in a rapidly changing global energy system. Canadian financial regulators, including the Office of the Superintendent of Financial Institutions, should take inspiration from the Task Force’s mandate. 2. Champions of change are pointing the way to a prosperous transition Also on Friday last week, Al Gore spoke at the launch of a new report on stranded fossil fuel assets - carbon resources that cannot be extracted and burned under an international climate agreement. He emphasized that “there are now trillions of dollars of stranded carbon assets.” Instead of betting on the fossil fuels of the 19th and 20th centuries, Gore urged more investors to take their money out of the most carbon intensive stocks and invest in renewable energy instead. "Divest, first from the riskiest assets and, over time, from all [assets] that look as if they are in danger of being stranded," he told an audience of international financiers. "And then invest in the fantastic new opportunities that are emerging in the low-carbon economy." Canadian investors may choose to hold onto fossil fuel stocks and demand that these companies adapt to new climate treaty realities. Or they may opt to sell off higher-risk carbon intensive stocks and transfer funds into other sectors. Either way, major changes are afoot.

3. Leaders are already aligning their investment portfolio to prosper in a lower-carbon world Investors looking for easy lessons on how to respond to climate change investment risk and Canada’s new 1.5 degree emissions budget target can look to the world’s largest pension funds. Speaking in Paris, the head of the US$185-billion New York Common Retirement Fund outlined how the fund is changing its management systems in recognition that “low-carbon, sustainable investments are key to our future.” In seeking to protect pension member savings, the fund “has long supported climate-aware strategies, and [an] expansion of our commitment offers a sensible solution that will protect the fund’s investments.”

At the World Climate Summit, Anne Simpson, the head of US$300 billion California public pension CalPERS reinforced the need for investors to act to ensure that their portfolio companies have climate-competent board members, provide data on how they are adapting to climate change, and revise executive pay to encourage lower-carbon business models. In the UK, the Environment Agency Pension Fund is already aligning their investment portfolio with a two-degree emissions budget – Canadian pension funds and other investors could not ask for better inspiration to act. These three examples indicate that aware investors can respond to climate policy action at local, regional, and international levels and continue to generate healthy returns. It is now up to financial industry leaders to show the world that Canadian investors can act quickly enough.