The growing need for investors to manage and disclose climate risks and opportunities

What’s sauce for the goose is sauce for the gander. It’s an apt phrase for 2017 and the growing momentum behind climate risk disclosure.

In December, the global Task Force on Climate-related Financial Disclosures, created by the Financial Stability Board at the request of G20 nations, released a set of recommendations for voluntary disclosures by investors and companies about their management of material climate risks.

This is a huge step forward for investors, who’ve been the driving force behind the global push to improve corporate climate risk disclosure. These recommendations build directly on years of work by Ceres and investor networks promoting financial disclosures of climate risks.

Which brings me back to my geese.

The task force recommends that asset owners and asset managers—not just corporations—implement these new recommendations. It’s the first time we’ve seen global climate disclosure recommendations specifically tailored for and created by asset owners and managers, including AXA, JP Morgan Chase, the Canada Pension Plan Investment Board, Barclays, PGGM, UBS Asset Management, Aviva and BlackRock.

The logic is clear. For the market to have the information it needs to manage the risks of climate change and pursue the opportunities of the transition to a low-carbon economy, every actor in the system has to participate.

This is important, the task force argues, not simply because disclosure by asset owners will help them better understand their own risks. As actors at the top of the investment chain, better disclosure could encourage changes to ripple throughout the entire ecosystem.

Which means that investors will need to adopt new skills and use new analytical tools to measure their exposure and develop strategies to manage the risks and opportunities.

The task force’s recommendations cover four core categories of disclosure: governance, strategy, risk management, and metrics and targets. The recommendations are then customized for industries most impacted by climate change and the transition to a low carbon economy, including asset managers and owners, banks, insurers, and of course high carbon industries.

A closer look at the recommendations shows how useful they are. For example, the task force recommends that all organizations describe the impact of climate-related risks and opportunities on their businesses, strategy, and financial planning.

Then, for asset owners, the task force explains that this means describing how climate-related risks and opportunities are factored into relevant investment strategies. This could be described from the perspective of the total fund or investment strategy or individual investment strategies for various asset classes. 
While the task force’s recommendations for asset owners and asset managers are far reaching, others have pioneered an even higher bar for comprehensive climate risk disclosure and performance that investors should study closely. The Asset Owners Disclosure Project (AODP) ranks investors worldwide on their portfolio carbon risk management, engagement and low carbon investment work, and leaders in those ranking have developed best practices on climate risk disclosure and management.

For instance, the $303 billion California Public Employees’ Retirement System, (CalPERS), is mapping out the carbon footprint of all its asset classes. Its 2015 analysis showed that just 100 of the 10,000 companies it invests in account for more than 50% of its public equity portfolio’s emissions. During the next five years, CalPERS is increasing its engagement with these firms to drive disclosure of emissions and transition plans with the goal of reducing the emissions of these firms. According to Anne Simpson, CalPERS’ Investment Director, Sustainability, “We have an obligation to make sure what we have in our portfolios is understood as far as its climate risks are concerned and to make adjustments not just across our equity portfolio, but all of our asset classes.”

Others investors around the globe are also innovating, developing leading governance and risk management practices for climate change, and disclosing information about this important work:

• The UK Environment Agency pension fund has established an explicit objective to ensure the fund’s investment portfolio and processes are compatible with a 2°C world, through low carbon, energy efficient investment, decarbonizing their equity portfolio, and other initiatives.

• ABP (Netherlands) and PKA (Denmark) funds are leaders in developing ESG strategies with substantial input from their members, in forums such as the PKA’s annual meetings for members.

• The Church of England and the New York State Comptroller collaborated on a shareholder resolution to ExxonMobil, supported by over 60 investors with $10 trillion in assets under management, that asked the company to assess and report on how its business model will be affected by global efforts to limit temperature rise to below 2 degrees Celsius.

We’re at a transition point that will take adjustment. But to gain the biggest rewards from mitigating the impacts of climate change and making the transition to a low-carbon economy, it’s not enough for the market to insure that investors get disclosure from the companies they own—they have to provide it as well. By publicly demonstrating that how they are integrating climate risks into their investment decision making, investors will provide further impetus to companies to change their performance and decisions.

Veena Ramani is the program director of capital markets systems at Ceres, the nonprofit sustainability organization.