There is nothing like a deadline to focus the mind.
Asset owners and managers who are signatories of the United Nations-supported Principles for Responsible Investments have just five weeks left to complete their annual report on their environmental, social and governance metrics, with the filing deadline being March 31. The challenge in the 2020 report is what IPE Magazine calls “tough new reporting measures” on the potential impacts on investments from climate change.
The new climate change questions in the PRI report, are consistent with the elements recommended by the Task Force on Climate-related Financial Disclosures. There are 15 new mandatory questions covering two of the four elements of TCFD reporting: governance and strategy. For now, questions on the other two elements: risk management and metrics and targets are voluntary.
Based on my work with investment managers and on ESG reporting, I have learned that the strategy section causes PRI signatories the greatest difficulty. Signatories must identify, and ideally quantify, the financial impact of opportunities and risks from climate change on their investment strategy. This is different from much of the other ESG reporting on climate change, which focuses on the carbon footprint – or the contribution to climate change – embedded in investments.
Scenario analysis questions then test the resilience of these opportunities and risks under different states of the world that could unfold as the climate changes.
A survey of organizations that reported using the TCFD framework in 2019, presented by Unilever during a TCFD-implementation webinar on February 4 shows that, on average, less than half completed the strategy work. Only 45 per cent of survey respondents on average were able to identify opportunities and risks from climate change and only 47 per cent were able to anticipate the potential impact on their organization. And, only a small fraction (9 per cent) were able to test the resilience of their business strategy around opportunities and risks using scenario analysis.
While many PRI signatories may not have the resources and technical training to undertake scenario analysis, there are a growing list of third-party database providers that can easily complete the work for publicly traded equity investors.
But there are no easy solutions for private assets. These are portfolios of unique assets that can’t be captured in off-the-shelf databases. Scenario analysis requires alternative asset investors to complete an in-depth evaluation of the portfolio attributes under differing dynamic scenarios. Unlike public equities, this may result in a more qualitative assessment of resilience.
While it is mandatory to report on strategy, fortunately, PRI signatories’ responses can be kept private in 2020 .
In my opinion, by getting up the learning curve on the 2020 climate change questions, organizations may look at the process as a dry run and should plan to improve their process and resources for the 2021 reporting cycle.