The CSR Newsletters are a freely-available resource generated as a dynamic complement to the textbook, Strategic Corporate Social Responsibility: Sustainable Value Creation.

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Monday, November 11, 2013

Strategic CSR - Risk vs. Uncertainty

Al Gore writing in The New York Times is not interesting. Al Gore writing in The Wall Street Journal, as he did again a couple of weeks ago, however, is worth a read. In particular, the article in the url below by Gore and David Blood (Gore’s business partner with whom he has written previously, see: Strategic CSR – Corporate Stakeholder Responsibility) is interesting for three reasons. First, the distinction they draw between risk and uncertainty. In short, risk can be measured, uncertainty cannot:
“As the economist Frank Knight established, there is a subtle but crucial distinction between the two: Uncertainty is what good investors usually fear the most, because it cannot be measured or priced as risk can be. But when investors mislabel risk as uncertainty, they become vulnerable to the assumption that since it cannot be measured, they might as well ignore it.”
Second, the three risks (beyond “a meaningful carbon price”) that they argue threaten investors with significant carbon exposure in their portfolios (i.e., carbon-based resources and assets that will be stranded, or unused) as global efforts pick-up to prevent calamitous increases in global temperatures (“at least two-thirds of fossil fuel reserves will not be monetized if we are to stay below 2°C of warming”):
“First is regulation that could strand assets in several ways: direct regulation on carbon led by authorities at the local, national, regional, or global level; indirect regulation through increased pollution controls, constraints on water usage, or policies targeting health concerns; and mandates on renewable energy adoption and efficiency standards. … Second, stranding may occur as a result of market forces. Renewable technologies are already economically competitive with fossil fuels in a number of countries without subsidies. … Third, sociopolitical pressures (e.g., fossil-fuel divestment campaigns, environmental advocacy, grass-roots protests and changing public opinion) could create an environment in which carbon-intensive businesses could lose their ‘license to operate,’ thereby stranding assets.”
And, third, the four actions they suggest investors can take to assess the risks associated with carbon assets in their portfolios:
“First, identify carbon asset risks across portfolios. … Second, engage corporate boards and executives on plans to mitigate and disclose carbon risks. … Third, diversify investments into opportunities positioned to succeed in a low-carbon economy. … Fourth, divest fossil fuel assets.”
The case they make that carbon-based assets represent a risk that can be measured (rather than an uncertainty that can be ignored) by investors is compelling; provided, however, you agree with their implicit assumption that investors are rational and are willing to internalize the overwhelming scientific consensus about what will occur in the absence of intervention:
“Here is the relevance of carbon to investing: There is consensus within the scientific community that increasing the global temperature by more than 2°C will likely cause devastating and irreversible damage to the planet. Reliable measurements make it clear that we will easily cross this threshold in the near term at our current rate of CO2 emissions. So in an effort to avoid it, the International Energy Agency has calculated a global ‘Carbon Budget’ that accommodates the burning of merely one-third of existing fossil fuel reserves by 2050.”
The JFK quote they use to conclude their article mirrors the “Rational Argument for CSR” (Chapter 1, p26):
“In the words of President John F. Kennedy, ‘There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction.’ The transition to a low carbon future will revolutionize the global economy and present significant opportunities for superior investment returns. However, investors must also acknowledge that carbon risk is real and growing. Inaction is no longer prudent.”
Engagement is almost always preferable to withdrawal or, worse, ignorance. Withdrawal or, more likely, ignorance, however, are very real possibilities.
Take care
David Chandler & Bill Werther
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The Coming Carbon Asset Bubble
By Al Gore and David Blood
October 30, 2013
The Wall Street Journal
Late Edition – Final