Climate disclosures – why should we care?

Bank of EnglandAlyssa Gilbert, Head of Policy and Translation at the Grantham Institute, explores how disclosing information on companies’ strategic and practical approaches to climate risks could help engage investors in greener investments.

The role of green investments in building a low-carbon future was a hot topic at the UN climate change conference in Marrakech (COP22), which finished last week. And within the financial sector, awareness of investments that link profit and principles is gradually increasing.

Last September, Mark Carney, the Governor of the Bank of England and Chair of the Financial Stability Board (FSB), made a ground-breaking speech about the tragedy of the horizons in the finance sector. Decisions about investments are made with a short time-horizon that simply cannot take longer term issues, like climate change, into account; he warned.

In response, the FSB launched a task force on climate-related financial risks chaired by former-New York mayor, Michael Bloomberg, to try and find ways for the investment community to integrate climate change considerations more closely into their operations. It might not be immediately clear why it is so important for companies to publicly disclose climate-related financial risks, such as physical risks and policy risks, but this is a vitally important goal.

To explain, the ambition to limit global warming to below 2°C is already pretty tough and now every single sector of the economy needs investment to help achieve it. This investment needs to support innovative and new technologies and start-ups but, crucially, existing businesses need to play their part in steering toward a low-carbon future.

Investing with a conscience

Investors can choose to put their money in large, publicly-listed companies where they think they will get the most bang for their buck.

Savvy investors look closely at the fundamentals of a business and decide whether they think that they will make money over a given time. In addition, some investors care about other things – a business’s environmental performance, for example, or records on their treatment of their workers.

The bottom line, however, is that if you want to invest in a way that differentiates between businesses that care about these issues, and those that don’t, then what you need is reliable information. And that is where ‘climate disclosure’ comes in.

When companies disclose information about what they are doing about climate change, their attitude to the issue and associated risks and their long-term outlook, investors who care can move their money accordingly. These discerning investors might allocate their funds for environmental stewardship reasons, but may also do so because of the material risk that climate change may pose to the assets and businesses that they are investing in. These investors can also actively influence businesses by speaking up at shareholder meetings, or through other forms of engagement.

We brought together asset managers, asset owners and others to discuss these issues at the end of September – a year on from Mark Carney’s speech.

There was widespread agreement amongst our audience that the disclosure of information is an important first step, creating a better understanding of how climate change plays out as risks for the business world. The hope is this will eventually create markets for climate-savvy businesses.

Linking profit and principles

Climate finance sign at COP22
The role of financial investment was a key issue at the COP22 climate summit

However, information alone is not enough. Even with this knowledge, investors still need to care. There are many leading asset owners – often pension funds holding large sums of money to invest – that do place value on investing for both profit and principles. These include Adam Matthews, from the Church of England Pension Fund, who is spearheading efforts by a group of pension funds to deliver tools to help asset owners and managers make informed decisions.

It is clear, though, that while such asset owners are leading the pack, there are many more who are not concerned about anything beyond delivering the highest return possible on their investments in a time frame where climate-related risks might not yet bite.

The speakers at our event could however see the tide beginning to turn. For example, the UN initiative on the Principles for Responsible Investment (UNPRI) has seen rapid gains in membership as responsible investment gradually gains traction. It is not clear, though, if the investment community is changing its approach quickly enough to make a difference to the planet.

The Bank of England looks at these issues from the perspective of risk. Chief Actuary James Orr highlighted the clear-headed rational perspective that actuaries bring to the issue of climate change. These professionals are increasingly recognising the risks posed by climate change, both physical and policy-related, and consider these as factors, just like any others, that need to be weighed up appropriately by investors.

A gradual shift in investor awareness would be a welcome first step to engage this community in efforts to move to a low carbon future.

Speaking in September this year, Mark Carney has re-emphasised the importance of disclosure in creating markets, improving understanding of risks and as part of the approach to stimulating green investment.

The UN climate conference in Marrakech saw countless meetings on the sidelines about finance at all levels including the role of investors, but also the role of other multi-lateral organisations, like the Green Climate Fund, and innovative financing provided directly by governments such as the UK’s International Climate Fund. Our own event, which looked at the challenges on the ground of financing low-emission technology in different parts of the world drew in well over 100 people interested in finding quicker routes to investments in a low-carbon future.

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