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PRI Updates Reporting Framework, Investors Rally for CDP Disclosure, and More

January 27, 2023

The top five climate risk stories this week.

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PRI launches updated reporting framework

The world’s leading network of investors focused on environmental, social, and governance (ESG) factors rolled out an updated reporting framework that aligns more closely with top climate disclosure standards.

The United Nations-backed Principles for Responsible Investment (PRI), which has over 5,000 signatories from the financial sector, says the new framework is clearer, less cluttered, and more easily applicable. It’s also consistent with the Task Force on Climate-related Financial Disclosures (TCFD), the world’s premier climate reporting scheme, as well as the climate and sustainability standards under development by the International Sustainability Standards Board (ISSB).

The framework consists of 12 modules — some mandatory, some voluntary — each with its own set of reporting indicators. Organization-wide modules include the “senior leadership statement” in which top executives at PRI institutions describe their overall responsible investment approaches and lay out their plans for the next two years. There are also asset class-specific modules that aim to capture signatories’ responsible investment approaches for listed equities, fixed income, real estate, and more.

A module titled “policy, governance, and strategy” explicitly covers climate change and includes TCFD-aligned indicators that PRI institutions must complete. For example, one indicator asks signatories whether they have identified climate-related risks and opportunities that affect their investments. This mirrors one of the 11 TCFD disclosure recommendations on climate strategy.

The PRI’s three-month reporting cycle begins in May and will be the first since 2021. Last year, no reporting took place as the network refined its framework. Companies that fail to meet minimum reporting standards may be delisted from the network if they do not take remedial action.

The PRI assesses signatories’ reports, and uses the results to chart their progress on responsible investment, facilitate knowledge sharing, and help ESG-focused asset owners figure out how to best engage with their investment managers.

Major investors rally for CDP disclosure

Institutional investors Allianz Global Investors, HSBC Asset Management, and Canada Post Corporation Pension Plan joined 257 other financial heavyweights to urge companies to publish climate-, water-, and forest-related data last year, a new report shows.

CDP, a global nonprofit that oversees an environmental disclosure system used by over 18,000 organizations, runs a campaign with financial sector partners each year to pressure non-CDP reporting companies to respond to its annual questionnaires. The institutional investors use their sway to nudge these companies into disclosing their climate and environmental information.

The 2022 campaign targeted 1,466 companies, of which 388 responded to investor engagements. Of these companies, 293 submitted climate change disclosures for the first time, including big names Reliance Industries, Alibaba Group, Blackstone Group, and Virgin Media.

The campaign was particularly effective in Asia, where 141 companies submitted disclosures for the first time after being prompted by financial institutions. Globally, organizations in emissions-intensive sectors — such as transportation and power — were more likely to respond to the appeals than companies in other industries. 

Pension funds demand climate action from banks

Major retirement funds in the US and Europe are ratcheting up pressure on banks to curb their financing of fossil fuels.

On Tuesday, three New York City pension schemes managing a combined USD$177.5bn filed shareholder proposals at Bank of America, Goldman Sachs, JP Morgan, and RBC, demanding they set and disclose science-based absolute emissions targets for 2030. The targets should cover the banks’ lending and underwriting to the oil, gas, and power generation sectors, the proposals say.

“Shareholders applauded these banks when they set net zero goals – but it can’t be all talk,” said Brad Lander, the New York City Comptroller who oversees the city’s retirement systems. “We expect them to take the steps needed now to reduce emissions on the timeline to which they have committed.”

All four banks are members of the Net-Zero Banking Alliance, a coalition of lenders committed to decarbonizing their own portfolios. The banks have already set their own interim targets, but these all aim to reduce the carbon intensity of certain portfolios — rather than the absolute emissions they finance. For example, RBC’s oil and gas target, set last October, focuses on reducing the amount of emissions released per megajoule of extracted fuel. This target is not strict enough to force oil and gas emissions down in line with the reductions necessary to achieve a 1.5°C future, research from nonprofit Investors for Paris Compliance suggests.

In Europe, ABP — the continent’s largest pension fund — has said it could offload its stakes in certain banks if they fail to follow through on their portfolio decarbonization promises. In comments made to Bloomberg, ABP investments head Dominique Dijkhuis said the fund is implementing key performance indicators for lenders. She said banks that fail to meet them risk being divested from in the next three years. The Dutch institution has around €480bn (USD$522bn) of invested assets. In 2021, it made waves by announcing it would sell off its €15bn (USD$16.3bn) fossil fuel portfolio.

Investors knock UK’s proposed sustainable fund rules

Financial institutions have reservations about the UK Financial Conduct Authority’s (FCA) plans to stop investment firms from making fake green claims about their products.

A consultation on the FCA’s Sustainability Disclosure Requirements (SDR) closed on Wednesday. It proposes a new labeling regime for would-be sustainable financial products and strict rules on how these labels can be applied. 

In its response to the consultation, the Institutional Investors Group on Climate Change (IIGCC) — which represents over 350 pension funds, asset managers, and other firms — said it has “serious concerns” that the proposed regime could take a “mutually exclusive” labeling approach. 

Another respondent, the UK Sustainable Investment and Finance Association (UKSIF), said that although it is “strongly supportive” of the SDR’s objectives, certain provisions are “overly restrictive” and that one of the labeling categories needs “further refinement.” UKSIF is composed of nearly 300 members managing a combined £19trn (USD$23.5trn).

Under the draft SDR, financial institutions would have the option of applying one of three labels to each of their sustainable investment products. The labels are: ‘sustainable focus’, ‘sustainable improvers’, and ‘sustainable impact’. ‘Sustainable focus’ products invest in environmentally and/or socially sustainable assets, while ‘sustainable improvers’  seek to improve the sustainability of their assets over time. ‘Sustainable impact’ products invest in solutions to environmental or social problems. An anti-greenwashing rule in the proposal would restrict the use of ESG-related terms in the names and in the marketing materials of products that don’t have one of these labels.

UKSIF says the criteria for ‘sustainable improvers’ should be clarified to stop institutions from claiming the label if they aren’t taking action to reduce their funds’ environmental impacts. The organization says that the absence of “credible standards and common metrics” available to funds to measure their investees’ progress on ESG matters threatens the “effectiveness and integrity” of the ‘sustainable improvers’ label. It recommends the FCA produce a list of standards and metrics —  like carbon footprint and temperature scores — that funds can use to justify their ‘sustainable improvers’ label.

The FCA plans to use the feedback from the consultation period to refine the SDR and to release final rules by the end of June.

Sustainable investment products have surged in popularity in the UK. The FCA says UK-based responsible investment funds grew 64% over 2021 to £79bn (USD$91.5bn). 

US climate disaster insurance hard to access — study

Insurance against climate-related disasters — like hurricanes, floods, and wildfires — is often out of reach for marginalized US communities, a new study shows.

Sustainability nonprofit Ceres and the Wharton Climate Center looked at how insurance helps populations recover from extreme weather events, which are projected to get worse as the planet heats up. Over the last half-decade, major natural disasters have cost a record USD$150bn each year on average, according to the National Oceanic and Atmospheric Administration.

The study found lots of US households do not have insurance for climate disasters because coverage is expensive and may not be available in some high-risk areas. This is especially true for low- and moderate-income households and communities of color, which are disproportionately impacted by extreme weather events. 

Through interviews, the study’s authors found insurers may be unwilling to invest in new products that cater to low-income households because these would yield low profit margins. They also said they are unfamiliar with these communities’ specific insurance needs.

“While progress has been made, overall, the insurance industry is not meeting the needs of low- and moderate-income households,” said Steven Rothstein, managing director of Ceres’s Accelerator for Sustainable Capital Markets.

The study includes recommendations for improving the affordability and availability of climate disaster insurance, including proposed changes to federal and state policy, regulatory reforms, new local government programs, and new private sector offerings.