Schumpeter on steroids – why the TCFD wants organizations to become resilient

Most managers fail to understand the extent of the changes coming our way. They simply don’t believe that climate change will lead to material risks – either for their clients or their investments. Physical risks? “A long way off.” Transition risks? “The government won’t harm businesses.” Many managers like to believe that companies will – as always – adapt to new challenges, while those who do not will go out of business. They refer to Schumpeter’s concept of creative destruction and capitalism’s transformative power – which eliminates obsolete sectors and sets financial and human capital free for emergent industries.

However, they are overlooking two important aspects. Firstly, in the words of BlackRock, the reallocation of capital has already begun – and is happening more quickly than anticipated. Secondly – again in the words of BlackRock –, there are not yet any roadmaps[1] for achieving a net-zero economy, and the markets are underestimating the profound changes about to happen. BlackRock therefore concludes that the path ahead is unlikely to be a smooth one.

We often use the following graph to illustrate the extent of the changes that businesses are likely to encounter (graph from Carbon Brief):

This is how we explain it: The black line on the left shows the exponential growth of global annual CO₂ emissions since 1990 (they have nearly doubled). Growing amounts of CO₂ are emitted every year, thus continuously increasing concentrations of CO₂ in the atmosphere. This leads to higher average temperatures and increased volatility worldwide (for example, rising drought and heavy rainfall in a specific region). The graph also illustrates the radical reduction of annual CO₂ emissions required to halt global warming at 2°C (represented by the colored lines). If more CO₂ is emitted, governments will fail to meet this target. Policymakers will have to make a choice and may, sooner or later, impose restrictions on the economy. The later the real economy is required to adapt to a net-zero economy (the darker curves), the swifter and more radical that change will have to be.[2]

What we are about to observe across several industries is likely to be equivalent to Schumpeter on steroids. It is no coincidence that the Task Force on Climate-Related Financial Disclosures (TCFD) places so much emphasis on resilience – a company’s ability to develop adaptive capacity.^[3]  In a nutshell, the TCFD wants companies to have what it takes to manage risks and seize opportunities – and to be able to communicate their position to investors and other stakeholders.

Olivier Jaeggi

[1]     The EU recently launched a partial roadmap for a 55% reduction by 2030: https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3541

[2]    Note that the time slots for taking early action (represented by the yellow and orange lines) had already been missed when this graph was created.

[3]    https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf, page 7 (document page 15)