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Climate Financial Risk Forum

Driving best practice in climate-related disclosure and risk management

5 November 2021 |
On Thursday 21st October, the outputs of Session 2 of the UK Climate Financial Risk Forum (CFRF) were launched. In this article, Kate Fowler, Senior Responsibility Analyst, sets out the role of the CFRF and why it is so important to developing industry best practice.

There is an ever-increasing drive – from both within and outside the industry – to improve financial institutions’ climate-related disclosures and the climate risk management approach that underpins them.

In 2020, the UK government announced an economy-wide introduction of minimum regulatory disclosure standards by 2025, as aligned with the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD) – a global framework for climate-related disclosures, which is already used by a large number of financial institutions as a basis for disclosure.

In June 2021, G7 members also leant their support to mandatory climate-related financial disclosures based on the TCFD framework, with pressure mounting for other countries to follow suit at the UN Climate Conference (COP 26). 733 investors representing $52tn in assets – ourselves included – have signed the 2021 Global Investor Statement to Governments on the Climate Crisis.

The work of the CFRF is therefore very timely. The CFRF itself is co-chaired by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) to advance our sector’s response to the financial risks generated by climate change. The aim is to build capacity and share best practice, publishing guidance developed by the industry, for the industry.

The CFRF was established in 2019, with 19 members from banking, insurance, asset management, pension funds and other industry bodies. Four working groups were created to tackle disclosures, scenario analysis, risk management and innovation. At the international business of Federated Hermes, we have chaired the Disclosures Working Group (DWG) since its formation in 2019, supported by the PRI as our secretariat.

As chair of the DWG, we led the development of the disclosures chapter of the CFRF guide published in 2020. This guidance helps firms of all sizes to strengthen their climate-related disclosures, with the key areas for initial focus identified, as well as more advanced recommendations for larger firms or those already disclosing. The guidance is tailored to asset managers, banks and insurers.

Over the past year, we have been working with members of the DWG on further outputs, which were recently launched alongside materials from the other working groups. Our CEO, Saker Nusseibeh, spoke at the FCA-PRA launch event about how these outputs can support industry efforts to advance best practice.

The DWG also produced a set of case studies, including one from the International Business of Federated Hermes on the evolution of our climate approach, which we hope will support newcomers in understanding the key drivers and resources needed to develop a strong climate management approach. What is clear from all three case studies is that to be effective, disclosure must be part of the overall climate management approach, rather than produced in isolation.

The second output is a briefing paper on managing the legal risks associated with climate disclosure. When we developed our 2020 guidance, we heard concerns from a number of industry members about potential litigation and liability risks associated with disclosure – particularly in relation to metrics based on incomplete or unreliable data.

That said, it was also clear from our industry outreach that financial institutions acknowledged the value of climate-related reporting, and the need to mitigate these risks. In the above paper, we draw heavily on the input we received from across the industry to support firms in disclosing climate-related information and to share good practice in managing legal risks. In particular, firms may wish to make it clear that due to issues with data reliability and availability, these metrics offer a directional indication and may not be precise in their detail.

And finally, the DWG developed an illustrative climate disclosure dashboard to provide practical guidance with real world examples and support convergence towards a set of common, consistent and decision-useful climate metrics. This dashboard builds on existing initiatives such as the TCFD, through the lens of four primary use cases: transition risk, physical risk, portfolio decarbonisation and mobilising transition finance with a fifth cross-cutting metric on engagement. This dashboard forms part of a wider cross-cutting report on data and metrics. Throughout the report, there is an emphasis on the need for metrics and targets to drive real economy outcomes.

The guidance published by the DWG was referenced in the FCA’s 2021 consultation paper on TCFD-aligned disclosure for regulated firms as a useful resource to support firms to voluntarily go beyond minimum regulatory compliance. Whilst the CFRF has a UK focus, we hope that many of the lessons learned can be applied in other jurisdictions. There has already been interest from the international community, as firms and regulators alike look to develop their reporting practices. As more and more countries begin to mandate climate-related disclosures for financial institutions, industry fora to share best practice will only increase in importance. Given the magnitude of the systemic risks posed by climate change, firms and regulators will need to work together if they are to improve the flow of information across the entire investment chain.

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