Following inquiry into green finance, Environmental Audit Committee concludes large companies and asset owners – such as pension funds – should be forced to report their exposure to climate change risks and opportunities.
The government should force large companies to come clean about their exposure to the impacts of climate change, according to MPs who today voiced concern about “short-term thinking” in the UK financial system.
Members of the Environmental Audit Committee (EAC) said today large companies and asset owners, such as pension funds, should have until 2022 to prepare for a mandatory system of climate risk reporting, requiring firms to set out how they plan to cope with the impact of the low-carbon transition.
In a report the Committee argued “structural incentives” in the UK investment chain encourage firms to focus on short-term risks at the expense of longer-term considerations, leaving them sharply exposed on issues such as climate change. Government should clarify the law in this area to make it clear that firms including pension schemes have a duty to protect long-term interests, and should therefore explicitly factor environmental risk into their decision making, the EAC concluded.
“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,” EAC chair Mary Creagh said in a statement.
“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 government has backed the voluntary guidelines set out last year by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure (TCFD), which aim to help companies assess and disclose their climate risk.
It has previously indicated it would give companies time to adopt the TCFD recommendations voluntarily before moving to mandatory enforcement. In response to the report, a government spokesperson said business has a part to play in tackling climate change. “We’ll consider the findings of this report alongside our review of the Green Finance Taskforce’s proposals to encourage companies to put greater emphasis on environmental considerations when making decisions,” they added.
But the EAC argued the government’s encouragement for publicly listed firms to adopt the guidelines does not go far enough, and urged ministers to ensure climate risk reporting applies equally to asset owners (such as pension funds) and their investment managers, not just listed companies.
“We do not believe a voluntary approach – in the medium term – will be effective,” the paper said. “The government should make reporting mandatory on a ‘comply or explain’ basis by 2022.”
The paper suggested mandatory reporting could be enforced without the need for new legislation. Instead, the government could issue new guidance under the Companies Act 2006 and make amendments to the Financial Reporting Council’s (FRC) Corporate Governance Code and UK Stewardship Code, and the Financial Conduct Authority’s (FCA) listing rules. “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, similar to France’s Article 173,” the paper concluded.
Ben Caldecott, director of the Oxford Sustainable Finance Programme at the University of Oxford and a Member of the UK Green Finance Taskforce, said the UK should aim to be a world leader in sustainable finance. “Information is the lifeblood of financial markets,” he said. “Ensuring that the City of London has the best and most reliable information on sustainability-related risks, opportunities and impacts will be fundamental to its continued success and its ability to act as the leading green financial centre. We must become the first country to properly and completely integrate the TCFD recommendations into our corporate governance and reporting framework.”