Why asset owners and managers fall behind on climate-risk disclosures

Asset owners and managers are yet to translate advocacy into action on climate-related disclosures.

As per the 2019 EY Global Climate Risk Disclosure Barometer, asset owners and managers obtained the lowest scores for coverage and quality of climate-related risk disclosures across all the sectors assessed. This ranking was similar to that of the 2018 analysis. Each of the asset owners and managers that were reviewed received a score for the coverage and quality metrics on the basis of how they addressed or implemented all of the 11 recommendations by the Task Force on Climate-related Financial Disclosures (TCFD).

On average, the companies covered roughly one-third of the TCFD recommendations related to governance, risk management, and targets and metrics. For recommendations related to strategy, it was slightly lower — less than 30%. Performance was particularly poor for recommendations related to strategy, mostly due to the lack of any disclosure regarding climate scenarios. This was the case for more than 75% of companies assessed.

The quality of disclosures was significantly poorer when compared with the other sectors, with disclosure scores from 12% for strategy and 18% for risk management. Only 23% of companies participated in Carbon Disclosure Project (CDP) reporting. This could partially explain the weaker coverage of the recommendations and low quality of disclosures overall; our results show that companies which participated in CDP reporting tend to have the most complete and TCFD-aligned source of information.

It appears the asset owners and managers sector has yet to translate its advocacy for disclosures for target companies into its own reporting of risks and opportunities. The best-performing countries within the sector in terms of both coverage and quality included the US, the UK, Canada, France and the Netherlands.

EY teams examined how the asset owners and managers sector performed against the four areas through which the TCFD recommendations are structured.

Governance

Only one-third of asset owners and managers disclosed some information regarding their climate governance structure. Of those companies, the majority mentioned that their board, rather than a specific group, oversaw the Environmental Policy or Sustainability (environmental, social and governance [ESG]) framework, which typically included climate-related issues.

The management process for climate-related risks was not specifically described, as it was most often embedded in the ESG management process. The disclosures did not include information such as the frequency of meetings during which climate-related issues were mentioned or a clear description of the interaction between the management and the board on climate-related issues.

Two of the top performers within the sample of companies assessed were more specific about the different governance bodies involved in the assessment, monitoring and management of ESG risks — including climate-related risks. The disclosures of these two asset owners and managers also explained the interactions between these distinct governance structures.

One top-performing company used the sustainable investment report to describe the chief financial and risk officer’s role on climate-related risks management, the interactions with the Climate Change Steering Committee and ad-hoc risk committees. Also, the company described details of how the board was updated and advised on risk management practices, including climate-related risks.

Strategy

Less than half (37%) of companies reported some detail of their climate-related risks and opportunities, and their criteria for materiality. Those asset managers who reported on climate-related risks usually covered both transition and physical risks. The physical risks disclosed often included the potential impacts of chronic and acute risks at the portfolio and asset level.

Most disclosures lacked an estimation of the financial impact of climate-related risks, with only 10 asset owners and managers mentioning quantitative financial impacts. Instead of estimating future financial impacts caused by climate-related risks, some asset managers reported on the budget they had allocated or were planning to allocate for low-carbon transition investments.

One company described three distinct climate-change scenarios and mentioned the assumptions made for each scenario. In each case, the scenario was linked to the company’s resilience to climate change, by estimating the range of expected return on investment under each scenario.

Risk management

Risk management was best addressed of all the TCFD components, even though asset owners and managers only covered 40% of the recommendations of that area. The disclosures related to climate risks identification and management processes most often described the asset managers’ ESG management processes, specifying that it included climate-related risks and opportunities.

Companies reporting information on their climate-related risk management process usually explained how climate risks management was integrated into the overall risk management process. Even then, over half of them still did not report any information regarding climate risk identification, management or integration into the overall strategy.

Some top-performing asset owners and managers provided details of their risk identification and management methods, including the criteria for risk identification and prioritization. These criteria included assessment of the portfolio’s exposure to stranded assets, carbon pricing and physical impact risks.

One company described the methodology, frequency and individuals responsible for monitoring and managing environmental and social risks — including climate-related risks. The risk assessments were performed based on business principles and standards, and also on a set of sector-specific guidelines, containing guidance on due diligence for sectors identified as higher environmental and social risks.

Targets and metrics

Unlike other sectors, asset owners and managers did not obtain the best coverage or quality scores for the targets and metrics component — with an average score for coverage of only 37% compared with 63% for the banking sector and 54% for the insurance sector.

The most commonly disclosed metric was the carbon footprint of the asset owner’s portfolio. To a lesser extent, the amount of investments in renewable energy was also often reported.

The methodology applied to estimate or calculate the portfolio’s carbon footprint was often lacking in the disclosures, and only a few asset owners or managers referred to internal carbon pricing.

A few of the top performers set targets to reduce their portfolio’s carbon footprint in alignment with a 2°C scenario and explicitly explained this in the disclosures. For example, one company stated in its annual report that they aligned their investment policy with the 2°C climate scenario set in the Paris Agreement and have set the following targets to achieve this goal: 

• Ten percent of its new investments would be devoted annually to green assets.
• Ten percent of its total investments would be in green assets by 2030.