No asset managers describe how strategies might change under different climate scenarios – TCFD

Status report from the Task Force on Climate-related Financial Disclosures

No asset managers surveyed by the high-level Task Force on Climate-related Financial Disclosures (TCFD) are yet describing how their strategies might change under different climate-related scenarios.

Scenario analysis was one of the key features of the TCFD, which has issued its first status report today – but to date the body initiated by Bank of England Governor Mark Carney has found little evidence of it amongst fund managers.

“Most of the asset managers provided information about their climate-related risks or opportunities, but none explicitly discussed how the risks or opportunities related to the short, medium, or long term,” the new report states.

“The majority provided information about how their investment strategies consider climate-related risks, but none described how their strategies might change under different climate-related scenarios.”

The TCFD did say that one unnamed manager described how it is exploring ways to measure the positioning of its portfolio versus a 2°C target.

As for metrics and targets, most provided information on their own greenhouse gas emissions but “only a few” provided information on the emissions associated with their investments — as recommended by the task force.

The TCFD also looked at 25 asset owners and found that most of them provided information about their climate- related risks or opportunities and how those risks or opportunities have affected their strategies.

But while several asset owners mentioned the Paris Agreement or the potential for varying future scenarios related to climate change “at a high level” only a few described the resilience of their strategies under different climate-related scenarios.

Laura Nishikawa, Director of Research, ESG Research, at MSCI wrote an analysis ahead of today’s TCFD update saying: “Quality scenario analysis could be a long way off.”

She found that less than 3% of the constituents of the MSCI ACWI [All Country World Index] as of August 18 had mentioned scenario considerations and/or analysis in their disclosures.“Even for companies that disclosed forward-looking indicators, almost none in the set had science-based targets aligned to a 2⁰C warming scenario.”

The TCFD looked at the disclosures of nearly 1,800 companies in eight specific groups (four financial groups: banks, insurance companies, asset managers, and asset owners and four non-financial groups). Although it acknowledges it’s early days it does say that “further work is needed” for disclosures to contain more “decision-useful” climate-related information.

“None described how their strategies might change under different climate-related scenarios.”

Carney said the report shows that “climate-disclosure is becoming mainstream” and that more than 500 companies are now supporters of the TCFD, including the world’s largest banks, asset managers and pension funds.

Meanwhile, the climate snapshot report from the PRI Data Portal, a searchable platform that allows asset owners and fund managers to access data reported to the Principles for Responsible Investment, reveals that scenario analysis has been taken up by 23% of asset owner signatories. In 2017 and 2016, the figures were 27% and 10% respectively.

Some 42% of asset owners, according to the PRI portal, now encourage their managers to monitor emissions risk – up from 32% just two years ago.

The data shows that 75% of asset owners act on climate change and related issues as part of action on long-term ESG trends – slightly down on the 76% in 2017 but up from 67% in 2016.

Meanwhile, the PRI has welcomed the US Senator Elizabeth Warren’s Climate Risk Disclosure Act, which would direct the Securities and Exchange Commission to require companies to disclose information about their climate change exposure.

The PRI’s view is that companies should use the TCFD as a practical framework for identifying and disclosing on financially relevant climate risks and opportunities. It says climate change is the number one ESG topic for PRI signatories.