A group of institutional investors, including numerous large Canadian defined benefit pension plans, has released a handbook outlining their experiences implementing the recommendations from the task force on climate-related financial disclosures.
The Canadian plans include the Alberta Investment Management Corp., the Caisse de dépôt et placement du Québec, the Canada Pension Plan Investment Board, the Ontario Municipal Employees’ Retirement System, the Ontario Teachers’ Pension Plan and the OPESU Pension Trust.
The task force was established in 2015 by the Financial Stability Board to develop a set of voluntary and consistent recommendations for companies to use to disclose information about climate-related financial risks to investors, lenders and insurance underwriters. The TCFD consulted and released recommendations in 2017.
“Since the launch, it has been encouraging to see the TCFD recommendations gain widespread adoption among global investors,” said the handbook. “However, we recognize there is still a lot to be done to get us closer to a more uniform and comparable approach to disclosure.”
The handbook digs into the areas of governance, strategy, scenario analysis, risks, metrics and targets, and demonstrates what institutional investors are doing on these fronts.
One topic is the role financial incentives play. “We have debated whether tying performance on climate change to financial incentives drives accountability and results,” it said. “Perspectives are mixed. A few of us have set clear climate change targets for our teams, linking them directly to financial incentives. Holding our teams accountable in this way has resulted in more engagement — provoking a greater level of interest. Others among us feel incentives can be stifling and may not always drive the right behaviours.”
On the topic of scenario analysis, the institutional investors noted they’re at different stages of the journey and it isn’t easy. “Scenario analysis is perhaps the most technically difficult and complex of the TCFD recommendations,” the CPPIB said. “This is why, for the initial phase, we wanted to leverage the expertise of an external provider to really get on with it, see the validity of the results and go from there.”
The Ontario Teachers’ provided an example of its narrative-based scenario analysis and low-carbon transition framework, while the OPTrust shared information about its top-down macro-economic approach.
“It’s crucial for investors to consider the macro-economic and systemic implications of different global warming pathways,” the OPTrust said. “Our main goal is to understand the impact on the funded status of the portfolio.”
The handbook acknowledged that some investors that are trying to incorporate scenario analysis are finding less than stellar results. Challenges include determining what warming scenarios, data sources and time horizons to use.
“Perspectives on the use of scenario analysis have been mixed,” it said. “Some of us have learned indicatively about the possible impacts on portfolios, but the detailed assumptions and approaches used by vendors tend to be a ‘black box’ process that is difficult to own. As a result, many of us are trying to work in-house to develop our own scenario analysis methodology. There remain many questions on scenario analysis, and many of us are keen to see some kind of industry consensus on a common approach.”
Yet, the key is getting started, the handbook noted. “Despite the data limitations, it may be necessary for investors to become comfortable with less robust climate data and disclosure for the time being. The state of disclosure should not drive decisions to do or not to do scenario analysis. It’s about starting the journey to explore how your organization fits into the transition to a low-carbon future.”
While the handbook shared many practical examples of work being done and successes to date, it also acknowledged there’s a long way to go.
“As we move forward, we plan on continuing to share our journeys and to collaborate on our respective approaches to measure, track and disclose climate risk.”