Asset owners and managers must integrate climate risk within risk management frameworks.
The investment community, including insurers, pension funds and asset managers, should call for additional transparency as they identify and address climate-related financial risks, according to Carlota Garcia-Manas, Senior Responsible Investment Analyst, Royal London Asset Management (RLAM), speaking at a webinar earlier this week.
“While we may not be able to predict the future, we can prepare for it by understanding the risks and opportunities as the world transitions to a low-carbon economy,” said Garcia-Manas. “Disclosure will enable change through transparency.”
Garcia-Manas said asset owners faced challenges in meeting recommendations made by the UK’s Department of Work and Pensions for trustees to carefully scrutinise third-party investment products and services to make sure climate risks are being genuinely managed.
“These checks can’t be completed without more extensive company and industry-wide disclosure,” she said, suggesting asset owners should support and utilize the framework provided by The Task Force on Climate-related Financial Disclosures (TCFD), and the risk management and disclosure guidelines of the Climate Financial Risk Forum (CFRF).
The CFRF was established by the UK’s Prudential Regulation Authority and Financial Conduct Authority in March 2019, to coordinate an industry-wide response to the UK government’s commitment to a net zero emissions by 2050. The CFRF published its guide to climate-related financial risk management and disclosure in June, designed to help firms to integrate climate risks into the existing risk management frameworks and decision-making processes.
The CFRF provides disclosure guidelines specific to various actors in the investment chain in line with the TCFD, as well as recommendations on governance and risk management, and underlying metrics “Best practice includes climate risk management below or level with clearly defined reporting lines, use of service providers’ remuneration linked with climate, and institution-wide training,” Garcia-Manas explained.
The CFRF recommends a three-step approach climate-related financial risk management, based on identification of exposures to physical and transition risks, development of climate-related scenarios, and assessment of financial impacts through appropriate risk measures and impact assessment tools.
Garcia-Manas said that the CFRF tacitly acknowledged that current gaps in data and disclosure mean that institutions will need to increase the granularity of their models and processes over time.
“Our personal experience is that some of those models and data are quite immature, particularly for some asset classes. So, we expect all disclosures to be supported by a summary of limitations and assumptions,” Garcia-Manas said.