UK Green Finance Inquiry report concludes climate change risk reporting should be mandatory

by Carol A Adams

Main points:

  • Pension fund Trustees have a Fiduciary Duty to consider long term financial risks of climate change
  • There’s a lack of regulatory mechanisms in place to ensure climate change risks are incorporated into investment decisions
  • Recommendations of the Taskforce on Climate related Financial Disclosures (TCFD) should be mandatory and enforced by 2022.

The Government, regulatory bodies and some pension funds have failed to take sufficient action to protect pensions from climate change risk.  That is the conclusion of the second report from the UK Government’s cross-party Environmental Audit Committee (EAC) following a Green Finance Inquiry.  The Inquiry, launched in November last year, received verbal and written evidence, including responses from pension funds about their approach and plans with respect to climate change risk.

The Committee was ‘deeply concerned’ with the lack mechanisms in place to ensure climate change risks are incorporated into investment decisions.  Key concerns were: ‘misunderstandings’ of the meaning of fiduciary duty; poor governance with respect to the application of fiduciary duty; and, lack of reporting (or plans to report) on climate related financial disclosures. Further,

We were deeply concerned to hear how structural incentives… promote the pursuit of short term returns by investment managers acting on behalf of pension funds, often leading to the neglect of longer-term considerations—including environmental sustainability and climate change-related risks and opportunities. (p16)

The report is critical of the Financial Conduct Authority (FCA) for failing to act on the Law Commission’s recommendations to clarify the duty of contract-based pension schemes to evaluate the long-term social and environmental impact risks of an investment. 

 …a minority of the top pension funds do not appear to have given climate change much strategic thought. This creates risks for beneficiaries. (p25)

The Law Commission clarified that considering social and environmental financial risks is necessary to fulfill a Trustee’s Fiduciary Duty.  Further, even where there is no known financial risk associated with negative social and environmental impacts the Law Commission notes that pension funds are legally able to avoid investments that have negative social and environmental impacts where they have good reason to believe that beneficiaries share their concerns and where decisions would not have a significant negative financial impact.  Whilst Trustees could consult with beneficiaries on this matter, the report quotes research showing that younger people are increasingly concerned about climate change.

 T‍he Government should clarify in law that pension schemes and company directors have a duty to protect long-term value and should be considering environmental risks in light of this. (p 16)

 Whilst the Minister of State for Energy and Clean Growth, the Rt Hon Claire Perry MP, gave evidence that the Government would seek to ‘make the [TCFD recommendations] stick’ in a way which was not ‘burdensome’ the report notes that the prevailing view from evidence received was that the recommendations should be mandatory.  It refers to my submission to the Inquiry noting it pointed out:

 … that there is ‘a significant body of academic research which finds that companies apply voluntary reporting recommendations and frameworks selectively’ and that mandatory disclosures which are not enforced, are not complied with. It cited poor reporting following the Companies Act 1985 which had required organisations with more than 250 employees to disclose details about their employment of disabled persons. (p28-9)

The CDSB’s submission similarly raised concern about the application of mandatory requirements arguing that reform and capacity building were required at the Financial Reporting Council (FRC) so that existing rules concerning the disclosure of material climate change risks were enforced.  Section 172 of the Companies Act 2006 requires already company boards to have regard to the impact of the company’s business on the community and the environment.

TCFD reporting is mandatory for all large asset owners by 2022.  This involves annual report disclosures on climate change risk in four areas:


  • Governance: Organisations should describe how climate related risks and opportunities are assessed and managed by an organisation’s management team and overseen by its board.
  • Strategy: Organisations should disclose the actual and potential impacts of climate related risks and opportunities on their businesses, strategy and financial planning. They should describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.
  • Risk Management: Organisations should disclose how they identify assess and manage climate related risks.
  • Metrics and Targets: Organisations should disclose the metrics and targets used to assess and manage relevant climate related risks and opportunities where such information is material. They should disclose their greenhouse gas (GHG) emissions, and the related risks.


Furthermore, the report calls for the FCA, FRC and the Pensions Regulator to ‘get up to speed’ with monitoring climate change risk management.

Note:  All quotes are from: Environmental Audit Committee (2018) Green Finance: Embedding Sustainability in Financial Decision Making, House of Commons, UK Parliament.


Debate: Integrated reporting and accounting for sustainable development across generations by universities

by Carol A Adams This article aims to stimulate debate on how integrated thinking and reporting can contribute to value creation for university stakeholders and achievement of the Sustainable Development Goals. Universities have significant … [Continue reading]

Pension funds adopt strikingly different approaches to climate change risk

by Carol Adams Pension funds invest for the long term and scientists have concluded that climate change poses a significant risk to all aspects of life, including water, food and energy security.  The implications for business are significant and … [Continue reading]

UK Green Finance Inquiry report released

by Carol A Adams Main points: Green investment levels have declined and are insufficient to meet legally binding carbon reduction targets Green bonds, carbon pricing, policy certainty and maintaining links with Europe are part of the … [Continue reading]

Pension funds and Defined Contribution members called to action on climate change

by Carol A Adams The Chair of the British Government's cross-party Environmental Audit Committee (EAC), Mary Creagh, has written to the Trustees of the country's top 25 pension funds asking some probing questions about climate change risks, … [Continue reading]

Bringing to life the value creation process in corporate reporting

by Kerry Hicks, Senior Policy Advisor, Australian Institute of Company Directors The reporting process should be seen as an investment which can bring huge rewards, says Dr Carol Adams. This interview with Carol Adams was first published by the … [Continue reading]

How accounting and reporting can grow sustainable finance

by Carol A Adams How can the financial sector support a more sustainable and inclusive economic system which is low carbon and resource efficient?  This question was tackled by a European Union (EU) 'High Level Group of Experts' in a report … [Continue reading]

Corporate Governance Code consultation tackles the big issues

by Carol A Adams Ethnic diversity, the UN Sustainable Development Goals, wider stakeholder interests and encouraging a longer-term focus are some of the issues considered in the UK Financial Reporting Council’s (FRC) consultation on the revision of … [Continue reading]

Losses, tributes and carrying on

By Carol A Adams In the last issue of the Sustainability Accounting, Management and Policy Journal (SAMPJ) for 2017, we pay tribute to two editorial board members who died in June. Malcolm McIntosh (1953-2017) and David Campbell (1963-2017) strove … [Continue reading]

The role of boards in enhancing the credibility of integrated reports

By Carol A Adams It is a clear expectation that Board members are financially literate and any Board using a skills matrix will encapsulate this in some way.  But what about an understanding of value beyond profit? Or of the broader risks and … [Continue reading]