Transparency high on the agenda for investors at COP23
Many investors are turning out at COP23 in Bonn to explain to ministers and delegates the importance of financial disclosures in line with the TCFD recommendations, says Peter Damgaard Jensen.
Amid the heat and light that flooded the UN Climate negotiations of December 2015 and the resulting Paris Agreement, there was another significant event held in the margins of that historic fortnight. At this, Bank of England Governor Mark Carney, in his role as Chair of the Financial Stability Board (the international body that monitors and makes recommendations about the financial system), announced a new voluntary private sector-led global taskforce that would identify the kind of financial information necessary for the providers of capital to judge the exposure of companies to risks arising from climate change.
To recall what Carney told his audience at COP21: “Whether they are investors or providers of capital as credit, the private sector doesn’t currently have the information to judge how far individual companies are exposed to climate risks, how well they are managing those risks and whether they are going to make progress.”
Carney had first proposed a taskforce to identify essential climate-related financial disclosures in a momentous speech given a few months earlier to the Lloyd’s insurance market. In this, he argued unequivocally that access to high-quality financial information would be essential if market participants and policymakers were ever to fully understand and effectively manage climate-related risks or, in his words, break through the tragedy of the horizon presented by climate change.
As soon as they appeared, investors strongly endorsed the Task Force on Climate-related Disclosures’ seven principles for effective reporting of climate-related risks and opportunities (structured around four core elements of governance, strategy, risk management, and metrics/targets) because they represent a vital step forward in global efforts to harmonise such practices and a major opportunity to drive much greater transparency.
With the substantial attention climate change has received over the past two years from the UK central bank and the Dutch pension regulator, as a consequence of Article 173 in France, and with the establishment of the European Commission’s High-Level Expert Group on Sustainable Finance (HLEG), it’s fair say that over the short time since the gavel came down on the Paris Agreement, climate change has fundamentally shifted from being a special concern among niche investors to a widely recognised market risk that no serious investor can afford to ignore.
It was no accident then, that ahead of this year’s G7 Summit in Taormina and G20 Summit in Hamburg over 380 investors (representing more than $22 trillion of assets under management) wrote to G7 and G20 governments demanding they continue to support the Paris Agreement (implementing their nationally determined contributions and developing more ambitious 2050 climate plans), better align policy to accelerate investment into the low-carbon transition, phase out fossil fuel subsidies and consider using carbon pricing, and swiftly adopt and implement climate-related financial disclosures, including those recommended by the TCFD.
It was no accident either, that investors will also be out in force this week at the latest round of UN climate talks. Speaking up at this crucial point in the global debate about climate action, investors attending COP23 in Bonn will underscore the importance of greater ambition going forward.
In particular, they will explain – in two key forums – why robust disclosure sufficient to ensure financial markets can price climate related risk correctly is essential to help realise the goals of the Paris Agreement, ensure a smooth transition to a low-carbon economy and truly bend the global emissions curve:
- During the UNFCCC’s high-level Finance Day investors will showcase their efforts to better analyse and address climate risk and to pursue the opportunities presented by the transition to a low-carbon economy.
- At an official side event organised by IIGCC and the seven other investor groups that co-sponsor the Investor Platform for Climate Action investors will discuss climate-related financial disclosures.
The article first appeared in Environmental Finance.
Peter Damgaard Jensen, CEO, PKA and Chair, IIGCC explains why disclosure of #climate risk is top of the investor #ClimateAction agenda today #COP23 https://t.co/z3R6IGWJgf via @Enviro_Finance #GlobalGoals #COP23Inv pic.twitter.com/FdUxgLQ9lW
— IIGCC (@IIGCCnews) November 15, 2017
Accelerating climate action by investors
Russell Picot, Chair of the HSBC Pension Scheme and Special Advisor to the FSB Taskforce on Climate-Related Financial Disclosure (TCFD), explains why later this month IIGCC will launch a new Investor Practices Programme closely focused on implementation of the TCFD recommendations.
On 31 October the Bank of England and the FSB’s TCFD open an important two-day conference looking at the use of scenario analysis by companies and financial markets to better assess climate risks, improve their strategic planning and advance their risk management processes.
The discussion at this event highlights the shift that has taken place in the financial community since Mark Carney’s now famous speech on the tragedy of the horizons – climate change is now a recognised market risk that no serious investor can afford to ignore. However, whilst a growing number of investors are both increasingly aware of climate change impacts and are integrating climate risk and opportunity into their investment decision-making in a manner consistent with their fiduciary duty, many are still on a journey to understand how best to do this.
I was therefore thrilled to accept an invitation from the board of IIGCC to chair its new Investor Practices programme, which I believe will help to accelerate investor action to address climate risk.
This new Programme complements the thought leadership work that IIGCC already provides - via its Corporate Programme focused on assessing the resilience of companies to climate risk and shareholder engagement - as well as through its Policy Programme that pursues engagement with policymakers at both a global and EU level. Building from this, it is clear to me that the IIGCC provides a crucial forum to launch a new in-depth programme which will support asset owners and managers to better assess and manage both climate risk and opportunity and to report on their actions effectively.
This new IIGCC Investor Practices Programme will initially have three key work streams:
Governance (securing board level commitment and integrating this through the organisation);
Strategic tools and metrics for analysing and integrating climate risks and opportunities across asset classes (in particular looking initially at scenario analysis); and
Practical support and guidance for IIGCC members, both asset managers and asset owners, on their climate disclosures, in line with TCFD recommendations.
The work stream on ‘governance’ issues will aim to facilitate swift and informative peer to peer learning through the sharing of best practice by investors already pursuing an active response to climate risk by integration of this into wider investment practice and strategic asset allocation. Part of this work will address how to strengthen engagement on climate change with pension fund trustees and how to encourage investment consultants to provide the best possible advice relating to the management and disclosure of climate risk.
The second key work stream in the new programme will set out to develop a roadmap explaining what strategies, tools and metrics are available to investors across asset classes to better manage climate risk and opportunity. One early element of this work will aim to assist IIGCC members implementing scenario analysis as part of their efforts to ensure more effective disclosure of climate-related risks and opportunities. Once we have developed a comprehensive view on scenario analysis, the programme will then consider green investment ‘impact’ strategies.
The third key strand of work within the new IIGCC Investor Practices programme will be an in depth facilitated dialogue between IIGCC’s growing membership on disclosure by
both asset owners and asset managers. Most specifically how do we actually do this, what are the steps required if we want to report against the TCFD recommendations, what does ‘good ‘disclosure look like over time, when do we talk to the auditors and other service providers, and so on. The goal of this work is the prompt development of pragmatic guidance.
As the scope and scale of this ambitious programme implies, we have no time to lose.
Full details of the programme, its structure and which investors are leading each working group will be explained at IIGCC’s Members Meeting on 29th November. For more information about that event, how to participate in the Investor Practices Programme or about IIGCC membership please contact Stephanie Pfeifer, CEO, IIGCC.
This article first appeared in Responsible Investor
— IIGCC (@IIGCCnews) October 31, 2017
14th October 2017 05:00:00 PM (UTC)
Aligning Europe’s financial system with the Paris Agreement
Stephanie Pfeifer, CEO of IIGCC runs through what we said about carbon pricing, CRAs, disclosure and more
For investors committed to climate action the work being done by the EU’s High-Level Group on Sustainable Finance (HLEG) is both very welcome and cannot come too soon.
For the financial sector to respond effectively to the climate challenge the EU must signal clear direction and expectations across all economic sectors – particularly energy, transport and industry. At the same time the EU must ensure that the entire system works in a holistic way such that regulations related to energy, climate or transport policy, some aspects of financial regulation and non-regulatory reforms recommended by HLEG pull in the same direction.
Such ambition must be backed by concrete, long-term targets and objectives as well as underpinned by a determination to increase over time the EU’s Nationally Determined Contribution to the Paris Agreement (with discussions on this starting promptly in 2018).
With all that in mind, a number of core recommendations lie at the heart of IIGCC’s response to the interim report of the EU’s High-Level Expert Group on Sustainable Finance:
Firstly, given the importance of price signals we suggest there is an urgent requirement for the EU to ensure a strong and enduring carbon price as part of the on-going negotiations on the reform of the EU Emissions Trading System. Without a meaningful price on carbon, investors will remain slow to adapt their investment towards low-carbon activities and may continue to misallocate substantial capital towards activities that continue to emit greenhouse gases – something that will harm the ability of the EU and its Member States to ratchet up their ambition under the Paris Agreement.
In addition, the EU must put in place a robust long-term policy framework where targets to 2050 consistent with the Paris Agreement are built in to the Clean Energy Package legislation, including measures relating to Governance of the Energy Union, Energy Efficiency, Renewables, and the Energy Performance of Buildings.
And critically, as IIGCC highlighted in a letter sent this week to policymakers in the Commission, Member States and the Parliament, the EU must set long-term targets for the transport sector that are strong enough to stimulate swift decarbonisation through both electrification and the use of alternative fuels.
Secondly, robust disclosure has a critical role to play in enabling financial markets to price risk correctly and ensure improved assessment and integration of risk and opportunities of climate change by companies and investors. We suggest the EU must strongly encourage the full implementation of the recommendations made by the G20 Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).
To that end the EU could, for example, monitor and evaluate the impact and effectiveness of the French Energy Transition Article 173 and other national instruments. It should seek to position itself as a global leader on the issue of disclosure, fostering and sharing best practice to enable the future development of possible guidance or legislation.
Thirdly, we argue it’s vital the EU drives a discussion with a view to providing full legal clarification that the currently fragmented ‘prudent person rule’ – the EU concept equivalent to that of fiduciary duty – allows for the consideration of environmental, social and governance factors by encompassing all financially material sustainability issues. Likewise, the EU should encourage the OECD to strengthen the current G20-OECD High-level Principles of Long-term Investment Financing by Institutional Investors and must seek to encourage Member States to review their fiduciary duty rules (as each country currently employs a different approach).
Fourthly, we agree that the EU has a powerful role to play in a number of other areas. For example, it can help to encourage all the major Credit Ratings Agencies fully incorporate sustainability and long-term risks into their ratings frameworks. It could also consider further research into how the incentives given to fund managers might cease to be framed only in reference to high-level performance over short-term horizons, to become better aligned with the goal of driving investment to deliver lasting sustainability over the longer term. The Commission could also continue work to develop a classification system for sustainable assets and financial products.
We stress that it’s vital the EU ensures all the work undertaken to establish new EU norms, rules and practices is pursued in consultation with established experts, reflects global perspectives, and builds upon existing best practice. With so much expertise and activity concentrated in just a handful of countries, we also suggest the EU must do more to bridge the gaps this creates within the European financial system, not least through the provision of more information, better resources, and additional training.
The EU’s High-Level Group on Sustainable Finance has a real opportunity to ensure a smoother and more efficient transition to a low-carbon economy if it focuses on the need for an integrated approach between climate and energy policy (and particularly robust carbon pricing) and the wider range of potential reforms currently under review.
To see the IIGCC’s position paper, click here
This comment was first published in Responsible Investor
— IIGCC (@IIGCCnews) October 16, 2017
— IIGCC (@IIGCCnews) July 13, 2017
23rd May 2017 09:18:00 AM (UTC)
Shareholder engagement on climate change comes of age
Edward Mason, Head of RI with The Church Commissioners explains what’s at stake at ExxonMobil this proxy season
One week ago, in a move that signalled a fundamental shift in their engagement with the oil and gas industry, institutional shareholders voted in huge numbers against the board of Occidental Petroleum to pass for the first time ever a contested shareholder proposal calling for more disclosure on the business impacts of climate change.
The proposal, lead-filed by Wespath Benefits and Investments, asked the company to undertake and publish climate scenario analysis for the business, including for a 2°C scenario. The vote in favour was a massive 67%. It is one of a family of 2°C scenario analysis resolutions this proxy season, the highest profile of which has been filed at ExxonMobil for its shareholder meeting on 31 May.
The core message of the Occidental vote is that major institutional investors, especially in the wake of the publication of the recommendations of the FSB Task Force on Climate-Related Financial Disclosures (TCFD), now have no qualms about asserting their requirement for climate-related disclosure when necessary.
Amongst those voting for the proposal was BlackRock, Occidental’s largest shareholder. This takes things another big step forward from last year’s scenario analysis proposals when, at ExxonMobil, a resolution was supported by a majority of the corporation’s top 25 shareholders, including its third largest, State Street, as 38% support was recorded notwithstanding board opposition.
The story of shareholder engagement coming of age was firmly underscored earlier this week in a new report from CDP and the four investor networks that make up the Global Investor Coalition on Climate Change (GIC). Investor Climate Compass: Oil and Gas – Navigating Investor Engagement combines CDP analysis of the performance of ten leading oil and gas companies on climate strategy and disclosure with assessments by investors of the progress achieved through engagement – where necessary assertive – since 2012.
The results confirm that investor engagement on climate risk is having a real impact on board and executive decision-making. They also confirm the work still to be done by investors if the companies are to face up fully to the challenges of the transition to a low carbon economy and assure investors that they are managing risks and opportunities prudently. On scenario analysis, the report finds that seven of the companies do some form of scenario analysis about the impacts of the Paris Agreement (and its goal to curb greenhouse gas emissions fast enough to keep global temperature rise to less than 2°C). Only three of these have sought to quantify the financial impacts of the IEA’ s 450ppm scenario. Exxon have done neither.
The report calls on investors to make their stewardship strategies for 2017/2018 more ambitious, using all the tools available, to ensure that companies:
• do more, and better, scenario analysis and transition planning
• disclose in line with TCFD guidelines; and
• secure the competence they need at board level for good climate governance.
The report places ExxonMobil firmly at the back of the super-majors’ pack on climate change strategy, disclosure and willingness to dialogue with investors (alone among its peers Exxon will not make non-executive directors available to investors to discuss governance of climate risk – or anything else for that matter).
This highlights that the most pressing outstanding investor action during the 2017 proxy season is to pass the 2°C scenario analysis proposal at Exxon co-filed by New York State Comptroller Thomas P. DiNapoli (as Trustee of the New York State Common Retirement Fund), the Church Commissioners for England and over 50 other investors with $5tn of assets.
ExxonMobil still contends that a 2°C scenario does not lie within a ‘reasonably likely to occur’ range of planning assumptions. Investors carrying the financial risk of climate change and the low carbon transition beg to differ.
I ask all institutional investors to ensure that they come down on the right side of this vote, which will be historic. With 2017 the year when shareholder engagement on climate change has come of age, asset managers whose stewardship practice lags peers will face even more difficult questions, not least from their asset owner clients.
Previously published in RI News.
— IIGCC (@IIGCCnews) May 15, 2017
Oil and gas industry heeding (some) investor demands on climate risks https://t.co/EnJlrpbj9f
— IPE.com News (@IPEnews) May 17, 2017
— Helen Wildsmith (@HelenWildsmith) May 19, 2017
30th March 2017 11:00:00 PM (UTC)
Scaling up green investments: from ambition to asset allocation
Like me, you may want to check this statistic, which I first heard about in a report on the UK’s carbon emissions for 2016. Apparently, that year, the UK’s carbon dioxide emissions fell to a level that was last seen in 1894. Yes,1894….the year, coincidentally, when the first petrol driven powered car was patented.
The decline of coal-fired power has been a major contributor to this trend, but the rapid deployment of low carbon technologies, notably wind power, but also solar have played a key role. Wind power, for example, produced more electricity than coal-fired power in 2016.
The growth in green technologies is not, however, just reserved to the power sector. Britons were reminded in mid-March that their energy bills actually declined in real terms between 2008-2016. The increasing costs of support for low carbon power having been more than offset by improved efficiency in electrical products such as lighting, fridges, freezers and boilers.
These changes in the UK - mirrored in other countries around Europe and the world - are part of a significant shift in the overall complexion of the economy. These changes are also evident in the approach that large investors are taking to their investments. This is why on 14 March, the Institutional Investors Group on Climate Change, together with WHEB and Pictet Asset Management, convened a members seminar to hear how leading asset owners and investment consultants are reshaping their approach to sustainable and low carbon investments.
Among large asset owners there has already been substantial progress
One thing that was immediately apparent is the progress that has already been made. Some 72% of respondents to an IIGCC survey have already made green/sustainable investment allocations amounting to €53bn in total. The most prominent asset classes so far are listed equities and real estate - which make up more than two thirds of the total - with other asset classes including private equity, fixed income, forestry and infrastructure accounting for the remainder. On average, asset owners have allocated 6% of their total assets to sustainable investment strategies; and all respondents indicated that they plan to increase their exposure to green investments in the future with the majority focusing on infrastructure, real estate and private equity.
Building a strategy involves multiple steps
There is no straight-forward ‘road-map’ for asset owners to follow, but some key steps emerged from the discussion at the IIGCC event in March:
Positioning environmental social and governance (ESG) issues generally, and climate change in particular, as materials risks was a key point. Reflecting this understanding in the Board’s approach to their fiduciary duty was also highlighted. Investment consultants emphasised the importance in starting by defining a set of ‘investment beliefs’ as a foundation for then integrating ESG risk and opportunity into investment processes and portfolios.
While only 25% of respondents to the survey indicated that they had set a specific target for low carbon or sustainable investments, it was nonetheless highlighted that targets are an effective tool in focusing attention on accelerating the shift into these types of investments.
Opportunities greater and risks lower than commonly perceived
Panellists also pointed to some misperceptions about the challenges in shifting assets into sustainable themes. For example, there are plenty of opportunities available across almost all asset classes (the dishonourable exception being hedge funds), and in many cases the experienced risk has proved much lower than what was anticipated.
Complexity, the overarching barrier
Complexity was highlighted multiple times as a barrier. Specifically, for example, around the definition of what ‘green’ or ‘sustainable’ should mean. No common set of definitions has yet emerged with most asset owners developing their own in-house definitions.
The education of trustees and consultants also remains a challenge – though it was noted that most Defined Benefit schemes on corporate pension funds are largely ‘de-risking’, so the agenda is most pertinent to Defined Contribution schemes, at least for corporate pension funds.
A lot of progress made, but a long way to go
The IIGCC seminar was heavily oversubscribed. No doubt this was in part because of the high quality of organisations presenting. It may also be due to a growing acceptance that sustainable investing is an increasingly important component of modern portfolio management. A lot has been achieved in a relatively short space of time. The world is now investing approximately US$300bn annually in low carbon infrastructure from virtually nothing just a few years ago. The challenge though is that to avoid catastrophic climate change will require US$1trillion of annual investments. A lot has been done. A lot more still needs doing.
Previously published in RI News.
— IIGCC (@IIGCCnews) March 31, 2017
— jenny anderson (@j_strattan) March 14, 2017
Investor Solutions Workshop: Scaling up green #investments - from ambition to asset allocation, 14 March, London https://t.co/IYnRHjqqo4 pic.twitter.com/qPHOAazUN3— IIGCC (@IIGCCnews) February 16, 2017