Environmental Audit Committee publishes new Green Finance Report

The Environmental Audit Committee has today published their second report on Green Finance and how sustainability can and should be embedded in financial decision making.

As a sustainability membership body working with post-16 education institutions to embed sustainability holistically into the institution, there are a number of stumbling blocks to success. This line from today’s report sums them up very aptly: “In some quarters we encountered an outdated perception that climate change is purely an ethical or corporate social responsibility issue rather than a real material risk to present and future value.”

We think there is great merit in drawing attention to these financial implications. Finance is a language spoken globally and by those that hold a great deal of power – it is important they see the potential ramifications of current unsustainable practices before it is too late.

The report makes several conclusions and recommendations. These can be summarised as:

Climate risks & financial regulation:

“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. 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.
• 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:

"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."
 

• 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)
• 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. (Paragraph 45)
• 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:

“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.”
 

• 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)
• 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)
• 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. (Paragraph 87)

Financial regulators and climate risk:

“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.”
 

• 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)
• Financial regulators have a responsibility to understand risks to financial stability and the financial institutions which they supervise. 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)
• 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. (Paragraph 108)