Concerns over climate change continue to dominate with hurricanes, floods and other natural disasters taking place with alarming regularity, against a backdrop of an annual rise in global temperature that threatens to disrupt the global ecosystem. Equally, climate change is a source of major risk to global financial stability…. and the numbers are increasing fast. According to a study last year published by the SwissRe Institute, climate change could wipe off up to 18% of GDP off the worldwide economy by 2050 if global temperatures rise by 3.2°C.
This of course impacts the whole of the financial system, from financial institutions – such as banks, insurance companies, stock exchanges, and investment houses to financial authorities include regulators, ministries of finance, central banks, securities market regulators, and banking and insurance supervisors. And ESG governance and risk measurement has risen to the fore as each of these stakeholders grapples with understanding risk on the balance sheet. To guide these endeavors the Financial Stability Board (FSB) created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information focusing on the four key financial sectors: asset management, asset owners, banks and insurance.
ESG Matters for Asset Managers
Asset Managers sit near the top of the investment tree play an important role as a trailblazer when it comes to recognizing and reinforcing the importance of climate-related disclosures with the organizations they invest in – in turn helping to engender better ESG reporting standards more widely. Furthermore, Asset Managers are ahead of the pack when it comes to understanding that robust ESG plans are a value creator, not just a legislative obligation.
Nonetheless, like all of us, Asset Managers are navigating an increasingly choppy landscape, a patchwork of different national reporting standards, evolving regulatory change and complex and urgent climate-related risks and opportunities. Aside from the growing trend in ethical investment portfolios, establishing resilience to ESG risks is also vital to protecting capital from hidden liabilities. Identifying the best practice route isn’t easy. While numerous standards exist to help structure a robust ESG framework, TCFD arguably contains the most commonly used standard and it is hard to imagine that any subsequent guidelines will differ widely to the those set by the TCFD, name to focus analysis and recommendations on four core areas – governance, strategy, risk management, and metrics and targets – to address climate change.
As of September, 2021, the Task Force had over 2,600 supporters globally, including 1,069 financial institutions, responsible for assets of $194 trillion (Source: TCFD Status Report, September, 2021).
ESG Risk Guard continues to be part of the wider discussion with its clients and industry associations about the opportunities which sustainable finance present.
We are on hand to help asset management firms like yours to enhance and supplement your climate expertise. To find out how we can help you and your businesses contact us now.