A cross-party parliamentary committee has told the UK Government to make changes to disclosure rules and fiduciary duty definitions to enable the country’s asset owners to integrate climate risk more effectively.
The House of Commons Environmental Audit Committee’s latest report, Greening Finance: embedding sustainability in financial decision making, says that “proper recognition and disclosure of [climate] risks and opportunities would help financial markets work more effectively and will enable UK institutions and investors to position themselves to benefits from the low-carbon transition”.
To do this, it recommends that the UK Government does more than just “encourage” listed companies to report on sustainability. “It is important to ensure that climate risk reporting applies equally to asset owners (such as pension funds) and their investment managers, not just listed companies as the Government has suggested,” it states, adding: “We do not believe a voluntary approach – in the medium term – will be effective”.
“The Government should make reporting mandatory on a ‘comply or explain’ basis by 2022,” as a first step, urges the report. Climate reporting is already required under the UK’s existing framework of financial law and governance, it claims, although the Government should update the following guidelines to clarify this: the Companies Act 2006, the Financial Reporting Council’s Corporate Governance Code and UK Stewardship Code, and the Financial Conduct Authority’s listing rules.
“Embedding climate risk reporting in relevant UK corporate governance and reporting frameworks could negate the need for new legislation,” the authors point out, but progress should be reviewed after one year. “If regulators fail to implement this appropriately and improve how they monitor the management of climate risk then the Government should pass new sustainability reporting legislation, similar to France’s Article 173”. Article 173 of France’s Energy Transition Law for Green Growth is seen as a far-reaching, influential piece of legislation.
In addition, the committee calls for changes to fiduciary duty definitions in the UK – in a move that strongly mirrors current efforts at EU level. The European Commission unveiled plans last month to make asset owners and managers disclose how they integrate sustainability into their investment decisions, and investors are expected to be required to consult with clients and beneficiaries on their ESG values, as a basis for these decisions. A raft of existing regulation and guidance at EU level is slated to be amended to clarify this.
Likewise, the UK Committee says “the Government should clarify that pension schemes and company directors have a fiduciary duty to protect long-term value, and should be considering environmental risks in light of this”.Since its inception, the Committee has consulted with a number of pension funds and market participants to establish what needs to be done to help the UK minimise climate risks in its economy. One such organisation was the National Employment Savings Trust (NEST), established by the Government as a default pension provider. According to the report, its Head of Responsible Investment, Diandra Soobiah, highlights confusion around fiduciary duty requirements in the UK.
“All the evidence points to climate change being a big economic risk in the future, but when I have made presentations on our climate-aware fund I still have questions from members of the audience asking, ‘How do you square this with your fiduciary duty?’ and numerous times throughout that presentation I have said, ‘This is about managing material financial risk for our members in the long term’, and I cannot emphasise that point any more than I already have,” she told the Committee.
In 2014, the UK’s Law Commission conducted a review concluding that although existing rules on fiduciary duty did require pension trustees to consider materially-relevant ESG factors in their investment decisions, in order to become effective, this needed explicit clarification. But the Government made no move to act on the advice and, in 2017, the Commission reiterated its findings in another report. By this point, the European Commission was ploughing ahead with its sustainable finance agenda, and had made it clear that investor duties would be a priority, launching a consultation on the topic last November. In December, the UK Government confirmed that it was “minded” to heed the Law Commission’s advice, and amend laws in the UK. It will launch its own public consultation to establish the wording of the amendments later this month.
In January, the UK’s Sustainable Investment Forum (UKSIF) highlighted the importance of aligning EU and UK developments on fiduciary duty to avoid complications after Brexit.
In another reflection of the EU’s Action Plan on sustainable finance, the Committee’s report urges the UK government to force fiduciaries to “actively seek the views of their beneficiaries” when creating their Statement of Investment Principles (SIP) and incorporate those views into the development of such documents.
“Pension savers should be given greater opportunities to engage with decisions about where their money is invested,” it said, adding that “there is evidence that younger generations would often prefer to see their money invested in a fossil fuel-free manner. They should be given greater opportunity to express this preference”.
The report is the second to be published by the Environmental Audit Committee in as many months. Its first explored ways of scaling up investment into clean energy in the UK.
The Committee recently engaged the 25 largest UK pension funds to see how they were dealing with climate risk, concluding that some big names in green investing, like Aviva Investors and Lloyds Bank, were actually “less engaged” than peers.
The Committee has 16 members from the leading political parties in the UK. One member, Labour’s Mary Creagh, recently sent a letter to the UK’s Chancellor of the Exchequer, Philip Hammond, seeking clarification on powers the Government plans to give its proposed environmental watchdog. The request comes after reports that the Government opposes giving such a body “powers like the European Commission’s to initiate enforcement action against the Government”.
Creagh stressed to RI the importance of legal recourse for environmental watchdogs, she said: “The European Commission has played a vital role in transforming the UK from the ‘dirty man’ of Europe in the 1970s to a world-leader on the Environment.The Commission’s power to start legal proceedings which can result in a fine has played a central role in protecting our treasured natural spaces and iconic British species.”
Earlier this year, the Government announced it would start a consultation on an “independent, statutory body, to hold Government to account for upholding environmental standards” as part of its 25 Year Plan for the Environment. RI was told that the Treasury have six weeks to respond to the letter.
Last month, the Environmental Audit Committee published another report blaming the UK Government for the “dramatic and worrying collapse” in the country’s green investments following widely criticised changes to its low carbon energy policy in 2015.