The Government should make it mandatory for large companies and asset owners—such as pension funds—to report their exposure to climate change risks and opportunities by 2022.
That is the conclusion of the Environmental Audit Committee in a new report on Greening Finance published today.
Mary Creagh MP, Chair of the Environmental Audit Committee:
"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."
The report found that structural incentives across the UK investment chain encourage a focus on short-term returns, often to the neglect of longer-term considerations – including environmental sustainability and climate change-related risks and opportunities. Confusion about the extent to which pension trustees have a duty to consider environmental risks can also prevent institutional investors addressing climate change risks. The Committee is calling on the Government to clarify in law that pension schemes have a duty to protect long-term value and should be considering environmental risks in light of this.
Giving pension savers greater say on how their money is invested
Considering climate change risk from the perspective of pensions is especially important given the long-time scales and huge sums of money involved. There are many hundreds of billions of pounds in UK pension schemes and these ‘asset owners’ sit at the top of the investment chain. The MPs want to see pension savers be given greater opportunities to engage with decisions about where their money is invested. The Government should require fiduciaries to actively seek the views of their beneficiaries when producing Statements of Investment Principles (SIPS).
Climate-related financial disclosures
There is growing international momentum behind moves to encourage financial reporting on sustainability. The Government has endorsed international recommendations on climate-related financial disclosures and says it has 'encouraged publicly-listed companies' to implement them. However, Ministers do not appear to have taken any specific actions to do this. Given the long time-scales and large sums of money involved in the management of pension schemes, 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. These groups should be given time to adapt and develop how they report on climate-related risks and opportunities. But the Committee do not believe a voluntary approach—in the medium term—will be effective. The Government should make climate risk reporting mandatory 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. The Government should now issue guidance immediately making clear that the Companies Act 2006 already requires companies to disclose climate change risks where they are financially material. The Financial Reporting Council's (FRC) Corporate Governance Code and UK Stewardship Code, and the Financial Conduct Authority's (FCA) listing rules should likewise be amended to require climate-related financial disclosures on a comply or explain basis by 2022. Embedding climate risk reporting in relevant UK corporate governance and reporting frameworks could negate the need for new legislation. 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 like France's Article 173.