The global market for financial information totals spending of over 23 billion GBP a year (Burton-Taylor International Consulting 2020) and, as explained below, is an important mechanism in ensuring the stability of financial markets and by extension the economies they operate in. If current projections are correct, the impact of climate and environmental change on financial markets is projected to increase significantly in the future, be that via direct means such as resource depletion, or indirect means such as carbon taxes and ESG regulations. Thus, information relating to the impact of climate and environmental change on financial markets is likely to be of growing importance to investors. Without it, they risk making malinvestments and contributing to inefficient market outcomes. Mindy Lubber, CEO of sustainability non-profit Ceres, voiced the concerns of many when she said in 2020 that “climate risk is mispriced [across all] financial markets”. Therefore, it is important to consider the future providers of such information and the potential impact they may have on varied stakeholders ranging from investment banks to individual investors.
Financial information is important because, in the broadest sense, financial markets are a mechanism that connect those with a surplus of funds to those that require them; for example investors can purchase shares from firms in the primary market. The investors have a monetary surplus and the firms have a requirement for more capital than they possess. Thus the market facilitates the transfer of funds from investors to firms. The efficiency of these financial markets relies on investors making informed rational decisions. To make these decisions, they require high quality, relevant, unbiased information on the factors that could influence their investments. If the information is flawed in some way, there will likely be instability in the markets that rely on it. In a paper by John Holland, Professor at the University of Glasgow Business School, problems with such information during the years preceding major financial disasters were shown to be contributory to the disasters in question. Therefore, the quality of financial information available to investors is important because it keeps markets, and by extension the economies they exist within, stable.
One organisation providing this information is the “Open-Source Climate Initiative” (OS-Climate). OS-Climate was founded in September 2020 and aims to provide open-source databases primarily comprised of information and data regarding the climate associated risk and opportunity of various investments. Backed by big names such as Microsoft, Amazon and Goldman Sachs, the initiative is leading the way in its industry, and is providing its service to the public at no cost. They envisage that their efforts will enable investors to properly factor climate risk into investment decisions.
With regards to the companies backing it, the question arises as to why three of the largest companies in their respective industries are spending money to develop a service they appear not to directly profit from. A growing sense of corporate responsibility is one possible reason, but the most significant and most likely factor is that these companies expect to receive a net benefit from providing the service, albeit not directly, as could be the case if OS-Climate sold information. Firstly, all three could benefit from using the service themselves, by accurately factoring in climate risk to make better investment decisions. Secondly, the open source and free nature of the information means competitors whose advantage comes from not being held accountable for their climate impact could see that advantage wane. Ultimately, this could result in less competition for those companies who hold themselves accountable for their climate impact. Thirdly, by making OS-Climate open source, there is a strong possibility that the low barriers to entry will entice others to become part of the project. This could result in rapid improvements in the OS-Climate platform and mean that relative to the initial investment, the benefits the founders gain might be larger than had the initiative not been open source and free to use. However, this does assume that improvements made by others actually have a measurable effect.
With respect to readers, OS-Climate could have a few potential impacts. Firstly, anyone who chooses to invest in the financial markets would have access to an entirely new source of information, through which they could make more informed decisions, and better judge risk relating to climate and environmental change. Since one of OS-Climate’s goals is to facilitate more investment into climate solutions, perhaps a potential long-term benefit to the public of OS-Climate’s future success would be the improvement, or prevention of further degradation, of their environment and climate. Furthermore, potential investors into a company may no longer need to trust companies’ environmental claims, as verifying them would likely be easy and free using OS-Climate’s information databases.
In conclusion, the impact of climate and environmental change on the financial markets may likely be factored into prices in the near future through the efforts of organisations like OS-Climate. OS-Climate currently leads the way in enabling this, but it is probable that others will soon follow given OS-Climate’s recent entry into the market and the low barriers to entry. Eventually, there is a chance that this information will be factored into markets well enough such that investment in climate solutions reaches a level where humanity begins to undo some of the damage done to the planet. Whilst seemingly far off, steps are at least being made in the right direction. As such, it is not entirely improbable that the emergence of this new category of information might be a turning point towards a more sustainable future.
By David Bendle
Sector Head: James Float