Corporates and asset managers scrutinised as climate disclosure requirements take shape
As the Financial Conduct Authority (FCA) lines up new corporate disclosure measures, the Treasury Committee and NGO ShareAction have launched separate examinations of the performance of asset managers against key Environmental, Social, and Governance (ESG) metrics.
The FCA has proposed that the UK's largest companies should disclose climate-related risks as part of a net-zero transition, with the firm's chief executive warning that the public remains unaware of the climate impact of investments and savings.
The UK’s financial watchdog has unveiled proposals that would lead to 480 UK companies, worth a combined market capitalisation of £2.3trn, having to disclose relevant data to outline how they are assisting or are failing to assist with the UK’s net-zero transition.
The businesses involved would cover almost two-thirds of the UK’s total market capitalisation and would have to disclose data in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) or outline why they have declined to do so.
The proposals are set out in a consultation that was launched by the FCA on Friday, and responses are open for three months. However, green groups have called for auditors to be placed under more scrutiny.
The FCA’s chief executive Andrew Bailey said: "The changes we propose will help to provide the transparency the market needs to be able to assess how well companies are adjusting to the risks of climate change," he said. "Improved disclosures will support better asset pricing and enable investors to make more informed choices about where to allocate their capital - which will ultimately support the transition to a low carbon economy."
Bailey takes over from Mark Carney as the Bank of England's new Governor next month. Both have today (10 March) responded to the Treasury Committee regarding advice on how investors can help consumers plan investments, pensions and savings from a climate-risk perspective.
Mel Stride MP, Chair of the Treasury Committee, wrote to both Bailey and Carney to ask whether rating systems could be introduced on financial products, similar to how EPC ratings highlight the energy efficiency performance of a building.
Bailey responded by claiming that “UK consumers do not yet have clarity on the climate-related exposures of their investments, and whether their savings, pensions and investments are aligned to achieving net-zero emissions by 2050”.
The FCA chief added that consumer protection could be undermined if there is a lack of transparent information on how asset managers are looking to de-risk finance.
Carney, who was appointed as UN special envoy for climate action and finance in December, claimed that the Bank of England is “examining the case for a brown-penalising factor” that would place charges on polluting activities.
The responses come as the Financial Reporting Council (FRC) prepares to launch a major review into the quality of how companies and auditors are reporting on climate change impacts and risks, including the pace at which the TCFD framework has been adopted.
It is the latest in a string of framework introductions that suggest that climate disclosure could become mandatory in the 2020s. The Green Finance Strategy, for example, includes expectations for publicly listed companies and asset owners to disclose climate risk and impact data by 2022 and to work with regulators as to whether this becomes a mandatory requirement.
Assets under risk
On the asset manager front, NGO ShareAction this week examined 75 of the most influential firms worldwide to explore governance approaches to climate change, biodiversity and human rights.
The organisation found that more than half of the asset managers examined had a “very limited approach” to managing ESG risks, receiving a D or E rating as a result. In fact, just one-third of the asset managers scored higher than a B. Five asset managers – Robeco, BNP Paribas Asset Management, Legal & General Investment Management, APG, and Aviva – were rated A in the 2020 survey.
However, the combined assets under management (AUM) of those that ranked D or E reached $36trn – which is greater than the GDP of the US and China. Those asset managers accounted for 64% of all AUM assessed.
The world’s six largest managers all sit in the D and E band of ShareAction’s rankings and have a combined AUM of more than $20trn – these are BlackRock, Vanguard, State Street Global Advisors, Fidelity Investments (FMR), Capital Group and J.P. Morgan Asset Management.