13 November 2017
Many investors are turning out at COP23 in Bonn to explain to ministers and delegates the importance of financial disclosures in line with the TCFD recommendations, says Peter Damgaard Jensen
Climate change has shifted from being a special concern among niche investors to a widely recognised market risk that no serious investor can afford to ignore
Amid the heat and light that flooded the UN Climate negotiations of December 2015 and the resulting Paris Agreement, there was another significant event held in the margins of that historic fortnight. At this, Bank of England Governor Mark Carney, in his role as Chair of the Financial Stability Board (the international body that monitors and makes recommendations about the financial system), announced a new voluntary private sector-led global taskforce that would identify the kind of financial information necessary for the providers of capital to judge the exposure of companies to risks arising from climate change.
To recall what Carney told his audience at COP21: "Whether they are investors or providers of capital as credit, the private sector doesn't currently have the information to judge how far individual companies are exposed to climate risks, how well they are managing those risks and whether they are going to make progress."
Carney had first proposed a taskforce to identify essential climate-related financial disclosures in a momentous speech given a few months earlier to the Lloyd's insurance market. In this, he argued unequivocally that access to high-quality financial information would be essential if market participants and policymakers were ever to fully understand and effectively manage climate-related risks or, in his words, break through the tragedy of the horizon presented by climate change.
As soon as they appeared, investors strongly endorsed the Task Force on Climate-related Disclosures' seven principles for effective reporting of climate-related risks and opportunities (structured around four core elements of governance, strategy, risk management, and metrics/targets) because they represent a vital step forward in global efforts to harmonise such practices and a major opportunity to drive much greater transparency.
With the substantial attention climate change has received over the past two years from the UK central bank and the Dutch pension regulator, as a consequence of Article 173 in France, and with the establishment of the European Commission's High-Level Expert Group on Sustainable Finance (HLEG), it's fair say that over the short time since the gavel came down on the Paris Agreement, climate change has fundamentally shifted from being a special concern among niche investors to a widely recognised market risk that no serious investor can afford to ignore.
IIGCC recently set up an Investor Practices Programme which, in its early stages, will have three key workstreams that closely reflect a strong overall focus on the TCFD recommendations:
- Governance (securing board-level commitment and integrating this through the organisation);
- Strategies, tools and methodologies for analysing and integrating climate risks and opportunities across asset classes (specifically focused on scenario analysis);
Practical support and guidance for asset managers and asset owners (IIGCC members) on their climate disclosures, in line with TCFD recommendations.
It was no accident then, that ahead of this year's G7 Summit in Taormina and G20 Summit in Hamburg over 380 investors (representing more than $22 trillion of assets under management) wrote to G7 and G20 governments demanding they continue to support the Paris Agreement (implementing their nationally determined contributions and developing more ambitious 2050 climate plans), better align policy to accelerate investment into the low-carbon transition, phase out fossil fuel subsidies and consider using carbon pricing, and swiftly adopt and implement climate-related financial disclosures, including those recommended by the TCFD.
It was no accident either, that investors will also be out in force this week at the latest round of UN climate talks. Speaking up at this crucial point in the global debate about climate action, investors attending COP23 in Bonn will underscore the importance of greater ambition going forward.
In particular, they will explain – in two key forums – why robust disclosure sufficient to ensure financial markets can price climate related risk correctly is essential to help realise the goals of the Paris Agreement, ensure a smooth transition to a low-carbon economy and truly bend the global emissions curve:
- During the UNFCCC's high-level Finance Day investors will showcase their efforts to better analyse and address climate risk and to pursue the opportunities presented by the transition to a low-carbon economy.
- At an official side event organised by IIGCC and the seven other investor groups that co-sponsor the Investor Platform for Climate Action investors will discuss climate-related financial disclosures.
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Peter Damgaard Jensen is CEO of Danish pension fund manager PKA and chair of the Institutional Investors Groups on Climate Change.