The UK government should require large companies to report their exposure to climate change risk, the UK's House of Commons Environmental Audit Committee said in a report on greening the finance sector.
Environmental Audit Committee urges reporting by 2022
Committee wants to protect UK economy from climate risk
Mandatory disclosure could impact availability of finance
If enacted into law, mandatory climate risk disclosure would likely impact the long-term availability of finance to support carbon intensive assets and businesses.
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"The Government should make it mandatory for large companies and asset owners, such as pension funds, to report their exposure to climate change risks and opportunities by 2022," the committee said in a report Monday.
"We need to fix the incentives in our financial system that encourage short-term thinking. Long-term sustainability must be factored into financial decision making," said committee chair and member of parliament Mary Creagh.
"Climate change poses financial risks to a range of investments, from food and farming to infrastructure, construction and insurance liability. The low-carbon transition also presents exciting opportunities in clean energy, transport and tech that could benefit UK businesses," said Creagh in a committee statement.
"We want to see mandatory climate risk reporting and a clarification in law that pension trustees have a duty to consider long term sustainability, not just short-term returns," she said.
With 75% of FTSE100 companies' earnings coming from outside the UK, and UK pension funds holding investments across the international financial markets, mandatory climate risk reporting would have impacts far beyond the UK economy.
The committee's report found that structural incentives across the UK investment chain encourage a focus on short-term returns, often to the neglect of longer-term considerations including environmental sustainability and climate change-related risks and opportunities.
"Confusion about the extent to which pension trustees have a duty to consider environmental risks can also prevent institutional investors addressing climate change risks," the committee said.
"Considering climate change risk from the perspective of pensions is especially important given the long time-scales and huge sums of money involved. There are many hundreds of billions of pounds in UK pension schemes and these 'asset owners' sit at the top of the investment chain," it said.
The lawmakers on the committee want to see pension savers be given greater opportunities to engage with decisions about where their money is invested.
Currently, corporate climate risk disclosure is done on a voluntary basis, following the G20 finance ministers' request for global financial watchdog, the Financial Stability Board, to develop industry-led standards on financial disclosure of climate risks.
The committee said it does not believe the voluntary approach will be effective and needs to be strengthened.
"The Government should make climate risk reporting mandatory on a 'comply or explain' basis by 2022," it said.
The Bank of England has identified three types of risk arising from climate change: physical, liability and transition.
The physical impacts of climate change, such as rising sea levels and increased frequency and severity of extreme weather events, will create economic risks for a range of businesses and investments, from agriculture to infrastructure, construction and insurance, according to the BoE.
Liability risks involve the possibility that those who suffer losses from climate change take legal action to recover damages from those they hold accountable. For example, five oil and gas majors, BP, ExxonMobil, Chevron, ConocoPhillips and Shell, are facing legal action from the City of New York, which is seeking to recover the costs of protecting the city from flooding and erosion due to climate change.
Transition risks involve the possibility that companies which fail to diversify and adapt to climate policies experience negative impacts on profitability.
"Firms that do not make a timely transition and remain overly invested in climate-changing activities could face costly regulatory action, suffer reputational damage or see their assets become stranded as carbon prices rise," the committee said.
A Bank of England paper in 2016 warned that a "sudden, unexpected tightening of carbon emissions policies could lead to a disorderly re-pricing of carbon-intensive assets."
The Environment Audit Committee's job is to monitor and assess the extent to which government policies contribute to environmental protection and sustainable development.
The committee launched a green finance enquiry in November to examine how the UK can mobilise the investment necessary to meet its climate change targets and factor sustainability into financial decision-making.
As part of that enquiry, the committee held five days of hearings with investors, asset owners, experts, financial regulators and government ministers, and wrote to the 25 largest pension funds in the UK to seek information on how climate risks were being managed.
