Just over 12 months ago BlackRock CEO Larry Fink captured the zeitgeist of the investment industry when he articulated a pivot to sustainability in his well-read letter to CEOs entitled ‘A Fundamental Reshaping of Finance’.
A year on, transparency around climate risks exposure in investment portfolios remains scarce and accusations of greenwashing or “climate washing” continue to emerge. Fink’s recently published 2021 letter articulates advances made at BlackRock but from where I am sitting many industry participants significantly lag BlackRock’s stated position.
(A version of this blog was originally published under the title "Progress on Climate Transparency Remains Slow" in Australia's Investment Magazine.)
In 2020 Fink made reference to the Task Force on Climate-related Financial Disclosures (TCFD), a well-regarded global initiative established in December of 2015 with the goal of enhancing climate-related transparency.
Chaired by Michael R. Bloomberg, the TCFD is a powerhouse of climate focused action. Perhaps in some ways buoyed by BlackRock’s advances, the number of organizations expressing support for the TCFD has grown more than 85 per cent during 2019 and 2020, reaching over 1,700 organizations globally, including financial institutions responsible for assets in excess of $150 trillion.
For asset owners (including a very small number of Australian super funds) and corporations, support of, and adherence to, the TCFD has been an important step in their ESG approach. However, with large swathes of the average Australian super fund’s portfolio managed externally, the burden for transparency has landed on external asset managers to disclose more about their approach to climate-related financial risks as they build their portfolios.
To align with the TCFD recommendations, the investment managers (and the super funds as signatories) must disclose matters of governance, strategy and risk management as well as targets adopted by their organization on mitigating climate risks.
Moreover, the United Nations Principles for Responsible Investment (PRI) has mandated that its signatories report on climate indicators based on TCFD's recommendations as part of their PRI reporting. It is notable, however, that the PRI questionnaire is not fully aligned with the TCFD framework, so PRI signatories providing this information will not be able to claim compliance with TCFD reporting requirements. Further, many asset managers choose to keep their detailed PRI reporting private - meaning that this potentially valuable data is not immediately available in the public domain.
The badges of the PRI and TCFD provide green kudos to potential investors assessing appointing money managers. One global asset consultant referred to the TCFD as a “reassuring statement of intent on managing climate risk”.
However, for investors a lack of transparency regarding important aspects of climate strategy and governance impedes the assessment and comparison of external managers. As such it can be hard to differentiate between those for whom climate is truly central to their approach and those for whom it is largely remains only a forward-looking statement (or, of course, simply basic greenwashing).
At the corporate level transparency is coming. The UK is one of the recent adopters of TCFD at a corporate level, with full transparency required for large firms by 2025. In January 2021, BlackRock published its inaugural TCFD aligned reports.
However, for many fund managers equivalent transparency doesn’t appear imminent. For those of us that review manager issued documentation on sustainability, it is largely apparent that many fund managers are still developing their TCFD reporting.
Large global brands have referred to intentions to publish TCFD reporting although some signatories don’t refer to it at all in their annual sustainability reports. Computing the range of scopes of greenhouse gas emissions can be a complex task (with scope 3 as the most complex): however information on less complex areas such as “strategy” and “governance” are important and we see no reason to delay disclosure there.
Until transparency improves investors would be wise to consider a consistent set of diligence questions structured around the TCFD framework. For example, questions of managerial and board oversight of climate related issues and which climate-related scenarios are used in respect of scenario analysis? Additionally, insight on a manager or corporation’s approach to emerging regulatory frameworks and integration of carbon pricing into investment analysis are also significant factors.
With a Biden administration beginning to follow the direction of advancement set in the European Union, a focus on climate change and opportunities for forward thinking sustainable businesses are amplified. Furthermore, capital is being shepherded towards carbon neutral (or negative) investments by increasingly active governments and regulators. Asset owners must assess their investment portfolios as transparency expectations on the management of carbon emissions and other climate-related risks, (as well as opportunities and impacts) evolve.
Managers and asset owners that take a lead on transparency and due diligence now will be well placed, not only to gain assets, but more importantly to drive meaningful change in mitigating and reducing climate-related financial risks.
Alex Wise, head of Castle Hall in Australia and New Zealand, will be speaking at Investment Magazine’s upcoming Investment Operations Conference which you can register for here.
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