While institutional investors want to improve transparency in climate-related financial disclosures, they face unique circumstances that would make it difficult to accurately disclose an investment portfolio’s carbon footprints, according to Kevin Fahey, chair of the Pension Investment Association of Canada.
In a letter to Michael Bloomberg, chair of the Financial Stability Board’s task force on climate-related financial disclosures, Fahey wrote in support of better governance and standardization over how organizations disclose climate-change financials.
But he noted the Pension Investment Association of Canada is concerned with some of the task force’s recommendations, specifically those requiring institutional investors to disclose the carbon footprints of portfolios.
It “may be premature to expect the financial sector to publicly disclose their carbon footprint now,” wrote Fahey. “Disclosure by institutional investors’ depends entirely on the quality of disclosure of the entities in which we invest and the capabilities of those entities’ in-house environmental expertise.”
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He also noted that when institutional investors invest in the financial sector, they generally don’t focus on a company’s carbon footprint but instead on how it identifies and manages climate-related financial risks and how transparent it is regarding emissions.
“An investor’s first climate change consideration is how to integrate potential climate change impacts into financial analysis to identify relevant risks and opportunities across its portfolios and to conduct due diligence of potential investments,” wrote Fahey. “This is critical to discharging our fiduciary responsibilities.”
But when measuring carbon exposure, Fahey said disclosing companies’ specific greenhouse emissions doesn’t necessarily reflect the benefits of green investments in an investor’s portfolio. For instance, some technology companies generate greenhouse gases in their production process but ultimately reduce emissions from the use of their products, Fahey noted.
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He also noted it might be more useful to initially compare carbon exposures across sectors. “It would allow us to pinpoint areas where additional scrutiny is required, for example, if information is lost in aggregation,” wrote Fahey. “Comparing a portfolio’s total emissions against another portfolio or benchmark will, among other things, bring up important methodological issues.”
In his letter, Fahey agreed with the task force’s recommendation to adopt a phased approached in implementing disclosure requirements and emphasized the need for companies to have a clear framework to work from.
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