Analysis: FSB climate task force recommendations – the day ESG really got integrated?

High level group puts investors in the vanguard of climate disclosure

It may well be that December 14 2016 will mark the day that environmental, social and governance (ESG) truly got integrated: It might not be D-Day but it is certainly ‘TCFD-Day’.

The Financial Stability Board’s Task Force on Climate-Related Financial Disclosure (TCFD) has today firmly put investors in the vanguard of climate change disclosure. It clearly states that asset managers and asset owners “including public- and private-sector pension plans, insurance companies, endowments, and foundations”, should implement its recommendations.
Never again will asset owners or fund managers be able to claim it’s not their problem. As the report so eloquently says, asset owners and their fund managers “sit at the top of the investment chain” where they can influence the organizations in which they invest to provide better climate-related financial disclosures.

In specific guidance for asset owners, the Task Force has this to say: “Whether asset owners invest directly or through asset managers, asset owners bear the potential physical and transition climate-related risks to which their investments are exposed. Similarly, asset owners can benefit from the potential returns on the investment opportunities associated with climate change.”

And it goes on to say that climate-related financial disclosures by asset owners may encourage better disclosures across the investment chain – “enabling all organizations and individuals to make better-informed investment decisions”.

“Consistent with existing global stewardship frameworks,” the TCFD continues, “asset owners should engage with the organizations in which they invest to encourage adoption of these recommendations.

“They should also ask their asset managers to adopt these recommendations.”

The guidance is, of course, voluntary, but given the heft of those involved this is probably the hardest ‘soft law’ this sector has seen and it is difficult to see how the Task Force could have been more explicit.

A key feature of the recommendations are a set of seven disclosure principles (see separate story).

 Task Force believes financial sector disclosures could foster an early assessment of climate-related risks and opportunities, improve the pricing of climate-related risks, and lead to more informed capital allocation decisions.

Such disclosures might also “provide a source of data that can be analyzed at a systemic level, to facilitate authorities’ assessments of the materiality of any risks posed by climate change to the financial sector, and the channels through which this is most likely to be transmitted.”

And investors won’t be able to use the excuse about the poor quality of company disclosure. The Task Force did note how some investors were concerned about reporting on greenhouse emissions related to investments “given the current data challenges” and accounting guidance.

But the panel believes reporting metrics that “provide some visibility” into the concentration of carbon-related assets is important.The reporting of GHG emissions linked to investments is “a first step” and the Task Force expects disclosure of this information to prompt “important advancements in the development of decision-useful, climate-related risk metrics”.

And there’s no new disclosure frameworks to use either as the Task Force wants investors to “use their existing channels of financial reporting to their clients and beneficiaries” where relevant and feasible.

One group that gets off worryingly lightly, however, are investment consultants. They hardly rate a mention in the entire 226 pages of documentation the Task Force has released today. That comprises the Recommendations themselves (73 pages), a 110-page guide to implementing them and a 33-page supplement on scenario analysis. Clearly there is a massive amount for pension trustees to take on board – but consultants are lumped amongst a “variety of stakeholders” like stock exchanges, credit rating agencies that can “provide valuable contributions toward adoption of the recommendations”. This fundamentally underplays the role of consultants for asset owners. If the Recommendations have a flaw this is it: given the role investment consultants have in shaping investment behaviour and advising their clients, their lack of prominence is a serious omission.

David Blood, Senior Partner at Generation Investment Management, the boutique he co-founded with Al Gore, said the taskforce’s recommendations would “aid more efficient capital allocation” in the transition to a low carbon economy. The firm would integrate the FSB’s recommendations into its reporting structure and “engage portfolio companies accordingly”.

Today’s report kicks off a 60-day public consultation until February 12 2017. Then the final TCFD recommendations will be presented to G20 Leaders ahead of a summit in Hamburg in July. This is when it gets real.

From the supplemental guidance for asset owners:

  • Asset owners that perform scenario analysis should provide:
    – a discussion of how climate-related scenarios are used
    – a description of climate-related scenarios used and associated timeframes.
Asset owners should describe engagement with companies to encourage better disclosure
They should describe how they consider the positioning of their total portfolio with respect to the transition to a lower-carbon energy supply, production, and use.
  • Describe metrics used to assess climate-related risks and opportunities in each fund or investment strategy.
  • Asset owners should provide GHG emissions, where data are available, associated with each fund or investment strategy “normalized for every million of the reporting currency invested”.