Asset managers unhappy with multiple climate disclosure regimes, seek consistency

Global asset managers, tired of dealing with multiple regimes for disclosing climate and environment-related risks, say governments need to establish a uniform, yet simple, metric for reporting that will drive investments for achieving net-zero carbon goals.

"We cannot live with 300 different standards. It should be a global one; so it's comparable and it's also simple," Thomas Burberl, CEO of AXA, a French insurer that also runs an investment firm, said during a 5 May panel discussion on net-zero carbon goals organized by the Financial Times.

As more and more companies announce net-zero carbon targets and align their strategies, accurate reporting of the risks arising from climate as well as broader environmental, social, and governance (ESG) factors are needed.

Faced with pressure from governments and shareholders, asset managers like AXA, BlackRock, and others are incorporating climate risk into their decisions, whether that means increasing investments in companies that are developing clean technology, or supporting the manufacturing, or pulling out of fossil fuel-related investments.

'Multitude of standards'

"My fear as a global investor is that a multitude of standards will make it very difficult" to parse out which companies are truly investing in "green" projects, and which ones are taking advantage of the loopholes created by a lack of uniformity, he said.

"Today, we have a jungle of standards," he added.

Burberl said governments need to think about metrics for climate disclosure based on scientific evidence that are credible, yet simple to communicate.

Science-based standards

The UN-convened Net Zero Asset Owner Alliance, of which AXA is a member, is working on a science-based approach that links the degree of global warming potential with investment in a particular company or action. So, Burberl said, "you can say an investment has got 2.X degrees of warming potential."

In addition to uniformity, Lauren Chapell, CEO of UK-based Brunel Pension Partnership, said: "We need consistency, we need science-based standards, and we need to support activities that take us into the transition" to a net-zero carbon economy.

Investments cannot be seen in black and white terms, she said, agreeing with Burberl that asset managers not only need accurate disclosures, but also an insight into a company's strategies and policy decisions.

For instance, he said AXA has had to make decisions on whether to restrict its investment and related exposure in certain sectors, such as the coal industry, "where you see no willingness to transform."

EU Taxonomy

Burberl said he was encouraged by the EU's work on developing a taxonomy, which will protect against greenwashing by defining which investments are truly green. Updates to that taxonomy for the energy sector were released in late April by the European Commission (EC).

The US government lags behind the EC, but Burberl said he expects a combination of legal action and executive orders from President Joe Biden may result in development of uniform climate metrics. Burberl in fact sounded confident that the US, under Biden's leadership on climate, would soon overtake the EU.

The US Securities and Exchange Commission (SEC) has indicated it will work with international partners on developing a common set of principles for reporting risk arising from climate and environment-related impacts.

The SEC also alerted public companies against greenwashing their credentials in an alert sent out a month ago.

Complexity of standards

But there's a fear that regulators will make reporting more complicated than needed and unnecessarily costly.

"Complexity just costs a lot of money at the detriment of our investments," said Burberl. AXA has €555 billion ($665 billion) in ESG investments that include climate assets.

"My worry is … I really fear the complexity," Burberl said, noting that the extremes will be well-defined, but the frameworks don't work when it comes to technologies such as nuclear power. "What category does it fall under?" he asked.

The EC's new taxonomy illustrates this dilemma, as Burberl noted it deferred a decision on categorizing nuclear until the summer, after France lobbied heavily for nuclear power to be considered essential as a transitional source of energy. Similarly, the EU also deferred a decision on natural gas because some nations argued gas is essential for them to wean their power sector from higher-polluting coal power.

Understand the business

Besides taxonomy and consistency, Chapell said it was also important to understand the company before making investment decisions.

The investments of pension funds require a long-term look at a company's portfolio that cannot be ascertained through a short-term reading. As a long-term investor, Brunel Pension Partnership, she said, doesn't settle for a 12-26 month look at any company's portfolio, but instead has the luxury of considering the impact on the whole economy, including climate.

She, however, stopped short of calling for regulation of ESG/climate ratings, saying the pension fund has worked closely with UK regulators as well as other regulators at this task.

A recent study of ESG equity returns by Scientific Beta, a Singapore-based ESG/climate index platform, showed that ESG strategies are not resulting in outperformance as claimed by many asset managers.

Clock is ticking

Rochus Mommartz, CEO of Zurich-based responsAbility Investments, though agreeing with Burberl and Chapell on the need for uniform and consistent disclosure metrics as well as having the right taxonomy, cautioned against getting stuck in the regulatory process.

"Yes it has to be science-based," Mommartz said, reminding both Chapell and Burberl of a carbon budget against which measurements can be made.

But "we have to move forward … based on what we have right now," Mommartz said. "The clock is ticking."

Posted 05 May 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst