On 8 December 2020, the Monetary Authority of Singapore (MAS) issued Guidelines on Environmental Risk Management (the Guidelines) tailored to financial institutions (FIs) in three sectors: asset management, banking and insurance. The Guidelines are intended to drive the transition to an environmentally sustainable economy by enhancing the integration of environmental risk considerations in FIs’ financing and investment decisions and promoting new opportunities for green financing.
In early November, superannuation fund Rest and 25-year-old member Mark McVeigh agreed to settle McVeigh’s case against Rest related to handling of climate change risk. McVeigh’s claims included that the trustee of Rest had breached its duty to exercise the care, skill, and diligence required of a professional superannuation fund trustee in failing to identify and manage climate related risks to the fund’s investments. He also claimed that the failure to identify and manage climate related risks was a breach of the trustee’s duty to protect the best financial interests of beneficiaries. This litigation and settled outcome is significant, not only to Australian superannuation fund trustees, but to fiduciary investors with long term investment horizons globally.
Tackling climate change is not a new initiative in the UK. Indeed, the UK was one of the first countries worldwide to endorse the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD)1 – aimed at ensuring climate-related risks and opportunities are priced into financial decision-making, and its 2019 Green Finance Strategy outlined an expectation that all UK listed issuers and large asset owners would be making disclosures in accordance with the TCFD’s recommendations by 2022.
The Hong Kong Securities and Futures Commission (SFC) is moving towards implementing mandatory climate risk regulations for asset managers as part of the bigger process of integrating environmental, social, and governance (ESG) standards into the industry.
The chief executive officers of Canada’s eight largest pension plans are calling for the adoption of Sustainability Accounting Standards Board (SASB) standards and the Task Force on Climate-related Financial Disclosures (TCFD) framework. In a joint statement, the CEOs want “companies and investors to provide consistent and complete environmental, social, and governance (ESG) information to strengthen investment decision-making and better assess and manage their collective ESG risk exposures.”
Large companies and financial institutions in the UK will have to come clean about their exposure to climate risks within five years under the terms of a tougher regime announced by the chancellor, Rishi Sunak. In an attempt to demonstrate the government’s commitment to tackling global heating, Sunak said the UK would go further than an international taskforce had recommended and make disclosure by large businesses mandatory.
There is a growing consensus that climate change may present a systemic risk to financial markets. This assessment is shared by, for example, the Network for Greening the Financial System, the Bank for International Settlements, the Task Force on Climate-Related Financial Disclosure (TCFD), and the Market Risk Advisory Committee to the Commodity Futures Trading Commission, to name a few.
Aviva has set a new 2050 net-zero carbon emissions target for its own auto-enrolment default pension funds. This is aligned to the Paris Agreement and the Government’s own net-zero target. Aviva is committed to making progress towards the net-zero target as quickly as possible and is exploring the feasibility of a 2030 target, in-line with the Intergovernmental Panel on Climate Change (IPCC) 1.5-degree pathway4. As part of Aviva’s strategy to achieve this, it plans to invest over £5 billion into low carbon equities and climate transition strategies across its default funds over the next 18 months and will look to increase this level of investment after that.
There are prudential and financial stability risks associated with climate change and the transition to a sustainable economy which must be prioritized – something at the fore of the Central Bank’s approach to implementing the Environmental, Social and Governance (ESG) regulatory framework.
Tackling climate change is a central tenet of many post-COVID corporate strategies. More than 1,500 companies have now set targets to reach net-zero greenhouse gas emissions — that’s triple the number that had done so by the end of 2019.