The London Stock Exchange Group (LSEG) recently published a guidance document, adding its voice to the choir declaring the importance of issuers integrating climate change-related information into investor reporting and communications, stating:
Investors want to understand how issuers are responding to long-term and macroeconomic trends such as climate, demographic and technological change as well as political developments. A number of the world’s largest investors are allocating capital to companies that are well equipped to benefit from the transition to the low carbon economy, and wish to protect their portfolios against downside environmental, social and governance (ESG) risks. As an issuer, you should explain the relevance of ESG factors to your business model and strategy. You should make clear how your company is positioning itself, either to benefit from these factors or to manage and mitigate the risks associated with them. Issuers should also explain how they intend to access the new opportunities and revenue streams generated by green and socially beneficial products and services. (p9)
The guide is intended to, among other things, make ESG communication more effective and help companies understand the links between materiality and ESG issues, highlighting climate change frequently. It helps explain some of the risks and opportunities associated with the transition to a low-carbon economy and provides information for issuers to use in considering their strategy in light of this transition.
As our previous blogs have explained, corporate decision makers and managers have obligations to consider and disclose climate change risks and opportunities, where material. It’s also important that companies understand how to embed leadership in this areas in through building climate-competency in corporate board rooms.
A global study looking at the modern interpretation of fiduciary duty concluded that “failing to consider long-term investment value divers, which include ESG issues, in investment practice is a failure of fiduciary duty”. This global study, lead through PRI, UNEP FI, and The Generation Foundation’s, recently released Canada Roadmap for Fiduciary Duty in the 21st Century, which sets out recommendations for regulatory action, stewardship, corporate reporting and investor education, and in particular calls upon the Toronto Stock Exchange to expand its corporate reporting guidance regarding ESG factors.
Here’s how other institutional investors and asset managers are further contributing to the choir:
- OPTrust, a large Canadian pension fund, released a position paper calling for “collaboration in the development of standardized measures for carbon disclosure” to help institutional investors navigate the complexities of climate change. Its accompanying portfolio climate risk assessment provides the estimated return implications under four climate scenarios, and thus provides a leading example of how to report climate risks.
- State Street, a global asset manager with US$2.47 trillion under management, sent a letter pressing board members to disclose how their businesses are preparing for the impacts of climate change as well as other ESG issues. The company hopes to shift its strategy towards the positive screening of key sustainability metrics.
- The New York City pension system announced that it would start analyzing its carbon footprint as it is faced with growing concerns of investment risk due to companies failing to adapt to climate change. This analysis is an important precursor to reporting and subsequently managing the potential risks and opportunities presented by climate change.
The LSEG’s guidance likens the transition to a low-carbon economy to the introduction of mass automation and computing, as the industrial changes to overcome climate change environmental erosion and resource depletion signal a new cycle of economic change. The recent CPA Canada report on climate-related disclosures shows that Canadian companies are beginning to integrate climate-related risks and opportunities into their regulatory disclosures. As the trend to identify, manage and disclose climate-related information continues, we anticipate greater attention to these issues by investment decision-makers and corporate executives alike.