Greening Finance: embedding sustainability in financial decision making Contents

Conclusions and recommendations

Climate risks & financial regulation

1.There is growing recognition that climate change—and the world’s response to it—will pose financial risks over the coming years and decades. In the 40 to 50 years it will take today’s young people to reach retirement age the projected rise in sea levels and the increased frequency and intensity of extreme weather events will have economic consequences for a range of investments—from food and farming to infrastructure, home building and insurance. Proper recognition and disclosure of these risks and opportunities would help financial markets to work more efficiently and will enable UK institutions and investors to position themselves to benefit from the low-carbon transition. (Paragraph 13)

2.The Bank of England and Governor Mark Carney have shown leadership on this issue, setting out the risks to financial stability and putting the issue on the agenda of the G20. The Government must do more to prevent the ‘tragedy of the horizon’ by ensuring that financial institutions, businesses and regulators factor long term environmental risks like climate change into financial decision making. (Paragraph 14)

Pension saving & environmental risk

3.Considering climate change risk from the perspective of pension regulation is especially important given the long timescales involved and the many hundreds of billions of pounds in UK pension schemes. Pension fund trustees have a fiduciary duty to act in the best interests of their beneficiaries. This include taking account of long-term risks, such as those arising from climate change. Although we heard examples of good practice during the inquiry, the Government also admitted in its evidence that there is widespread misunderstanding amongst trustees on the scope of their fiduciary duty in relation to environmental risks. (Paragraph 34)

4.We were deeply concerned to hear how structural incentives also promote the pursuit of short term returns by investment managers acting on behalf of pension funds, often leading to the neglect of longer-term considerations—including environmental sustainability and climate change-related risks and opportunities. The Government should clarify in law that pension schemes and company directors have a duty to protect long-term value and should be considering environmental risks in light of this. (Paragraph 35)

5.A worrying disparity currently exists in the guidance to trust-based pension schemes (regulated by the Pensions Regulator) and contract-based schemes (overseen by the Financial Conduct Authority) when it comes to considering environmental risk as a financial factor. This is the result of the FCA’s apparent reluctance to act on the Law Commission’s recommendations on clarifying the duty of contract-based schemes in relation to environmental, social and governance factors. The FCA should rectify this by the end of the year. (Paragraph 36)

6.Pension savers should be given greater opportunities to engage with decisions about where their money is invested. There is evidence that younger generations would often prefer to see their money invested in a fossil fuel-free manner. They should be given the opportunity to express this preference. (Paragraph 45)

7.In its forthcoming consultation the Department for Work and Pensions should propose a change in the law to require pension fund fiduciaries to actively seek the views of their beneficiaries when producing their Statement of Investment Principles or Investment Strategy Statements. The DWP must set out guidance on how to ensure that evidence of members’ views is gathered robustly. (Paragraph 46)

Climate risk reporting

8.Implementing the recommendations of the Task Force on Climate-related Financial Disclosures would put climate change on board room agendas and provide companies and investors with the information to take a longer-term perspective when it comes to the potential risks and opportunities it poses. The Government says it has ‘encouraged publicly-listed companies’ to report on the risks and opportunities of climate change, but Ministers do not appear to have taken any specific actions to do this other than publicly endorsing the recommendations. (Paragraph 57)

9.Given the long time-scales and large sums of money involved in the management of pension funds, it is important 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. Requiring asset owners to report would ensure that trustees and investment managers actively engage with how companies are managing climate change risks. (Paragraph 58)

10.The full range of financial entities listed by the TCFD should be making climate-related financial disclosures. We need to see a ‘green thread’ running through the investment chain. This would ensure that climate risks and opportunities are considered at every point in the investment chain. The Government should set out in its response to this report what specific actions it will take to encourage take up. (Paragraph 59)

11.It is apparent from the responses of the ‘more engaged’ group of pension funds to the Committee’s letter that significant progress is being made by some pension funds, including commitments to TCFD reporting. However, a minority of the top pension funds do not appear to have given climate change much strategic thought. This creates risks for beneficiaries. We believe this patchwork approach shows the need for TCFD reporting to become a mandatory requirement for all large asset owners by 2022. (Paragraph 66)

12.To ensure that climate-related financial disclosures are comparable and reduce the cost of reporting for companies and investors, the Government should work with the Committee on Climate Change to determine the appropriate way to produce a range of baseline policy and climate change scenarios that can be used off-the-shelf as reference scenarios by companies and asset owners. (Paragraph 72)

13.We can see the advantages in giving companies and investors time to adapt and develop how they report on climate risks and opportunities. But only if reporting is mandatory are we likely to see comprehensive and comparable climate risk disclosures. (Paragraph 86)

14.The Government should set a deadline that it expects all listed companies and large asset owners to report on climate-related risks and opportunities in line with the TCFD recommendations on a comply or explain basis by 2022. The UK’s existing framework of financial law and governance could and should be used to implement climate-related risk reporting as the Green Finance Taskforce has recommended. For example, the Government should issue guidance making it clear that the Companies Act already requires companies to report on climate change where it is a material financial risk to their business. Companies and investors with high exposure to carbon intensive activities should already be reporting on climate risks in their annual reports as a matter of course. (Paragraph 87)

Financial regulators and climate risk

15.The UK could help to galvanise global momentum on climate-related risk disclosures by announcing at the G20’s leader summit in November that it will implement climate-related financial disclosures fully and that disclosures will be mandatory for large companies by 2022. During this timeframe the FRC’s Corporate Governance Code and UK Stewardship Code and the FCA’s listing rules should all be amended to require climate-related financial disclosures on a comply or explain basis. (Paragraph 103)

16.Embedding climate risk reporting in all relevant UK corporate governance and reporting frameworks could negate the need for new legislation. However, if UK regulators do not improve how they monitor the management of climate risk then the Government should pass new sustainability reporting legislation similar to France’s Article 173. (Paragraph 104)

17.Financial regulators have a responsibility to understand risks to financial stability and the financial institutions which they supervise. Evidence to our inquiry suggests that there are inadequacies in how the UK’s framework of financial regulation is currently monitoring climate change risk management. Among financial regulators in the UK, only the Bank of England and its Prudential Regulation Authority have given the issue the serious attention it requires. The FCA, FRC and the Pensions Regulator must get up to speed. (Paragraph 107)

18.There is a compelling case for other regulators to use the current round of adaptation reporting required by the Climate Change Act to integrate climate change risk management into their work. If financial regulators are to play a part in implementing the recommendations of the Task Force on Climate-related Financial Disclosures, it is important that they have gone through their own process of analysing the risks of climate change for their area of work and the firms they regulate. The Secretary of State for Environment, Food and Rural Affairs should use his Adaptation Reporting powers under the Climate Change Act to require the Financial Conduct Authority, Financial Reporting Council and the Pensions Regulator to produce Adaptation Reports. (Paragraph 108)

Published: 6 June 2018