Finance needs to lift its climate game

CFA Institute recently released the report Climate Change Analysis in the Investment Process to help investors gain the knowledge needed, and understand the resources available, to better incorporate climate change analysis in the investment process. The report includes a survey of global CFA Institute members and showed that 75 per cent of C-level executives surveyed believe that climate change is an important issue. However, only 40 per cent of all survey respondents (a larger sample size) say that their firms currently incorporate climate change analysis into the investment process. This gap between aspiration and the current level of practice on climate change integration at global financial firms speaks to the need for more resources to train today’s analyst and portfolio managers in climate change related analysis.

Climate change will have a substantial economic impact on earth in the coming decades, and the longer it takes to mobilise action around mitigating climate change, the larger the bill will become.

A recent Morgan Stanley report estimates that $50 trillion dollars will have to be invested in order to reach net zero carbon emissions goals by 2050. In a 2019 speech, Sarah Breeden, then the Bank of England’s executive director of International Banks Supervision, stated that if no action is taken to mitigate climate change, losses could be between $4 trillion and $20 trillion.

These substantial economic and investment costs that will be shouldered by global society can be aided by the financial community doing what it does best – efficiently allocating capital. At this point however, there are large gaps in climate data. Financial professionals need complete, comparable and accurate data on climate change from companies in order to do the job of efficiently allocating capital when it comes to the issue of climate change.

Unfortunately, the tools needed to incorporate climate change into the investment process are either lacking or are not well known by many financial professionals. In the survey mentioned above, of financial professionals who say they do not incorporate climate analysis into the investment process, 57 per cent say that this is due to a lack of proper climate related investment and analysis tools.

However, this is changing. With standards like the Sustainability Accounting Standards Board (SASB) focusing on material climate issues and the Task Force on Climate-related Financial Disclosures (TCFD) providing a framework for engagement around climate issues, more tools are being made available. The IFRS currently has a consultation paper out on sustainability reporting because it realises the importance of getting sustainability accounting right, so that externalities such as climate change receive the proper accounting treatment.

From accountants and auditors to portfolio managers and analysts, financial professionals have an important role to play in addressing climate change. This will take increased investment in education and training, as well as concerted engagement with companies and policymakers to ensure that what gets measured, gets managed.

CFA Institute has detailed the following steps that financial professionals, issuers and policymakers can undertake to help financial professionals include climate related analysis in the investment process.

• A price on carbon: To underpin robust and reliable carbon pricing, CFA Institute calls on policymakers to ensure that regulatory frameworks for carbon markets are designed to deliver transparency, liquidity, ease of access for global market participants, and similar standards across jurisdictions.
• Carbon price expectations included in analyst reports: CFA Institute recommends that investment professionals account for carbon prices and their expectations thereof in climate risk analysis.
• Increased transparency and disclosure on climate metrics: CFA Institute recognises the coalescing of the investment industry around the SASB and TCFD standards for climate-related disclosures, which are the most relevant and succinct climate-related disclosure standards that address the materiality of climate-related risks.
• Engagement with companies on physical and transition risks of climate change: CFA Institute suggests that investors should engage with issuers to ensure that climate data, scenario analysis, and related disclosures are sufficiently thorough to support robust climate risk analysis in the investment process.
• Education within the investment management profession: Investors need to continue to educate themselves about climate change to provide the climate-related analyses clients require.
• Policymaker involvement: Investors need to continue to urge policymakers to craft regulations to ensure that investors have the tools they need to do the work of finance.

Matt Orsagh is senior director, capital markets policy at CFA Institute