Climate disclosure – quality must beat quantity

The Climate Financial Risk Forum (CFRF) is the industry group co-chaired by the Financial Conduct Authority (FCA) and the Bank of England’s Prudential Regulation Authority (PRA) to support the evaluation of climate risks and opportunities in the financial industry. In October 2021, it published various free guides (1) which provide a framework for climate-related risk management, scenario analysis, innovation, disclosure, data, and metrics.

As part of the working group, I contributed to the methodical work completed by the CFRF over the last few months, helping to assemble climate guidelines for asset managers, banks and insurers, and giving general reference to others in the financial ecosystem.

Reporting overload

The CFRF was not alone in its work on climate disclosures during the period: the Task Force for Climate-Related Financial Disclosures (TCFD) had been reviewing its own guidelines; the FCA was consulting on its recommendations; and the Department for Business, Energy and Industrial Strategy (BEIS) as well as the Department for Work and Pensions (DWP) had already come up with recommendations of their own. The Chancellor of the Exchequer had also signalled in the summer around plans for an upcoming framework for sustainability disclosure, details of which were disclosed in October 2021, just ahead of COP26.

The government’s details are encompassed in their report, ‘Greening Finance: A Roadmap to Sustainable Investing’, where it highlights plans to ‘green’ the financial system in pursuit of net zero by 2050. The government’s strategy focuses on:

1. More disclosure – not only on climate but around other sustainability issues, for example, the Sustainable Disclosure Requirements (SDR)
2. The upcoming UK Green Taxonomy and labelling
3. Making the UK a hub and leader of green finance

The first phase of this new roadmap is focused on disclosure as a catalyst for action and the transition to a net zero and nature-positive future. Some of this is good news, and some is scary. As market participants, RLAM has been wholeheartedly supportive of good quality, decision-useful disclosure, we did after all support TCFD in 2020, voluntarily publishing our first TCFD report early in 2021. However, in the investment industry, asset owners and managers are feeling the pinch of reporting to an extent not seen since I started my career in ESG research more than 17 years ago. Back then the companies I researched would complain about ‘survey fatigue’ but now it’s ’disclosure and reporting fatigue’ which is altogether a more critical complaint. Good quality published information should be the backbone of investment analysis and decision making.

Make reporting count

We seem to have gone overboard. In my contribution to the CFRF disclosure working group I shared RLAM’s views about the need for coherence, convergence, and simplification in climate reporting. We spend more than one full-time equivalent (FTE) a year in ESG reporting now, so reporting has to count, has to be used, and has to be meaningful. But the data and methodology are not there yet and nor are the reporting frameworks. That’s why, as part of our contribution to the CFRF, we focused on two key goals of climate reporting:

1. Supporting real world decarbonisation and not just portfolio decarbonisation: we cannot assume that an improvement in data-quality and the tracking of ESG data in investment portfolios will lead to better sustainability outcomes in the real-world.
2. Quickly updating new methods of reporting – for example, the Enterprise Value Including Cash (EVIC) tool developed by the Partnership for Carbon Accounting (PCAF) – so that they can effectively report against more complex financial products, particularly in fixed income and mixed private and public market instruments.

Yes, the perfect should not be the enemy of the good, but as intermediaries between company disclosure and asset owners’ investment decisions, investment houses have a delicate balance to strike. One that takes into consideration the limitations of disclosure, their ‘fitness for purpose’, and the lack of convergence between methodologies.

We are 100% committed to improving the architecture that underpins climate disclosure, ensuring that liability is limited for intermediaries that are currently working with imperfect data. And we will continue to seek improvement in the quality and usefulness of information available to us.

(1) Guides

Risk Management – Risk appetite statements

Risk Management  –  Use cases

Risk Management – Climate risk training

Scenario  Analysis – Implementation guide

Disclosure – Case studies

Disclosure – Managing legal risk

Innovation – Commentary report

Innovation – Case study videos

Climate Data and Metrics – Guide

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.