Awareness of climate risk and its impact on the investment world is rising rapidly, but there are a number of challenges confronting asset managers and fund boards – from the implementation of a climate risk and governance framework to the availability of the tools and skills needed to monitor and manage climate risk.
The increased awareness of climate risk has been partly driven by reporting requirements such as the EU’s Sustainable Finance Disclosure Regime (SFDR) as well as voluntary initiatives like the Taskforce on Climate-Related Financial Disclosures (TCFD). Other regulations are in motion, such as the UK’s Greening Finance Roadmap and Sustainability Disclosure Requirements.
Although we are at the formative stages of this, we are also seeing more climate-focused investment products, from green bonds to climate change ETFs.
But, as asset managers look to implement their climate change commitments and comply with their reporting requirements, a perceived challenge of data availability has arisen. In many instances this data does exist and is readily available. So how and why is this perception gap emerging?
Is data and management information flowing into fund boards in a consistent format? Are boards sufficiently informed to make sense of it? Furthermore, to what extent are other functional business areas, such as audit and risk, viewing climate change as a key operational risk? And do fund boards require their own set of data as part of their monitoring and oversight responsibilities?
Another major governance challenge is the misalignment between the respective reporting requirements for asset owners and asset managers. To make effective governance decisions on climate risk, asset owners and fund boards need data at a consolidated level and at a security level. The latter is still a significant challenge within the asset management industry, especially for the firms that are rightly treating climate as a traditional investment risk but feel that they lack the necessary information to do so.
In this survey, Funds Europe, in partnership with CACEIS, sought to answer these questions and examine the extent to which fund boards and asset managers are incorporating climate risk factors into their internal governance, investment risk management and their product design and development.
We also explore the various drivers for climate-based investment products, the reporting requirements from regulation, and the critical role that climate-related data will play in this rapidly developing market.
Among the survey’s key findings:
The risks of not getting it right are well understood
- 83% of respondents said that there is reputational risk if climate commitments are not adhered to.
- 45% said that climate change risk standards will become mandatory. Just 10% do not think so.
Recognition on asset management boards is still growing
- Only 36% of respondents highlighted that their asset management boards are overseeing the integration of climate risk considerations into business and risk management processes.
- 34% of fund managers do not provide any investor reporting on climate risks and only 19% of respondents mentioned that they have the reporting in place to provide full disclosure on climate risks.
Reporting climate risk is a challenge
- 37% of fund boards do not have sufficient information on climate risk and how it impacts the funds or mandates that they oversee.
- 79% of respondents cited lack of consistent methodology as their biggest challenge in building a climate risk reporting framework. A lack of data (35%) and data inconsistency (33%) were also cited.
Product development underway
- 51% said that a stronger climate-focused approach would be a key focus for product design and 57% said new products would be aligned to investors’ sustainability preferences.
Read the full report
1: Survey highlights
2: Creating a climate risk framework
3: Importance of investment risk overlooked
4: Internal governance still developing
5: Education and skills are key
6: Data availability challenge misplaced
10: Recommendations and regulation
LIVE STREAM: Do fund boards have sufficient oversight of ESG and climate risk? Watch on demand.
© 2022 funds europe
