The UK Government’s Environmental Audit Committee has recommended that it should be mandatory for large companies and asset owners to report their exposure to climate change risks and opportunities by 2022.
The Committee’s new report on Greening Finance concluded that such a measure would encourage companies to focus on long-term considerations like environmental sustainability and climate change risks, rather than short-term returns.
More widely available data on exposure to climate risks may also promote awareness of the climate protection gap and encourage companies to purchase additional catastrophe insurance.
Furthermore, the report called on the UK Government to clarify in law that pension schemes, which often invest in fossil fuel industries, have a duty to protect long-term value and should be considering environmental risks in light of this.
UK pension schemes deal with many hundreds of billions of pounds, and, given that there is evidence that younger generations would prefer to see their money invested sustainably, the Government should require fiduciaries to more actively seek the views of their beneficiaries, according to the report.
Mary Creagh MP, Chair of the Environmental Audit Committee, said: “We need to fix the incentives in our financial system that encourage short term thinking. Long-term sustainability must be factored into financial decision making.
“Climate change poses financial risks to a range of investments – from food and farming, to infrastructure, construction and insurance liability. The low-carbon transition also presents exciting opportunities in clean energy, transport and tech that could benefit UK businesses.
“We want to see mandatory climate risk reporting and a clarification in law that pension trustees have a duty to consider long term sustainability, not just short-term returns.”
There is growing international support for more thorough financial reporting on sustainability, and the UK Government has already endorsed international recommendations on climate-related financial disclosures and has encouraged publicly listed companies to implement them.
However, few specific actions have been taken, and standards have not been previously applied to asset owners (like pension funds) and their investment managers.
The Committee claims that, in the medium term, a voluntary approach will not be effective, and suggests that the Government should introduce mandatory climate risk reporting on a ‘comply or explain’ basis by 2022.
According to the report, these standards could be implemented without the need for new legislation if the Government can effectively enforce the existing climate risk disclosure guidelines in the Companies Act 2006 and amend the Financial Reporting Council’s (FRC) Corporate Governance Code and UK Stewardship Code, and the Financial Conduct Authority’s (FCA) listing rules.
