The following guest blog was written by Matt Orsagh, CFA CIPM, Director of Capital Markets Policy at the CFA Institute.
Even in the midst of the COVID-19 pandemic, it is instructive to recognize that climate change likely will be the most impactful economic issue of this century. Most investors and financial professionals, however, are still playing catch-up when it comes to incorporating climate change analysis into the investment process.
For this reason, CFA Institute recently published Climate Change Analysis in the Investment Process. This report aims to educate investors about the inclusion of climate change data in the investment process so that investors can focus on the business of finance—efficiently allocating capital while considering the increasing influence of climate change.
The data around climate change and the needed climate-related disclosures by corporate issuers are one of the study’s main themes. The report educates investors about the economic, physical, and transition risks associated with climate change, while also directing them toward existing data resources and disclosure standards, such as those offered by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD), that focus on financially material climate-related information.
Recommendations for Action
CFA Institute calls for action from investors and financial professionals to take the steps necessary to adequately incorporate climate analysis into the investment process. These steps include the following:
- A price on carbon: CFA Institute calls on policymakers to ensure that regulatory frameworks for carbon markets are designed to deliver transparency, liquidity, ease of access for global market participants, and similar standards across jurisdictions to underpin robust and reliable carbon pricing.
- Carbon price expectations included in analyst reports: CFA Institute recommends that investment professionals account for carbon prices and their expectations thereof in climate risk analysis.
- Increased transparency and disclosure on climate metrics: CFA Institute notes that the investment industry is coalescing around SASB and TCFD standards for climate-related disclosures, which are the most relevant and succinct climate-related disclosure standards for addressing the materiality of climate-related risks.
- Engagement with companies on physical and transition risks of climate change: CFA Institute asserts that investors should engage with issuers to ensure that climate data, scenario analysis, and related disclosures are sufficiently thorough to support robust climate risk analysis in the investment process.
- Education within the investment management profession: Investors need to continue to educate themselves about climate change to provide clients with the climate-related analysis they require.
- Complementary policy: Investors need to continue to urge policymakers to craft regulations to ensure that investors have the tools they need to do the work of finance—that is, the efficient allocation of capital that helps to tackle the existential threat of climate change.
CFA Institute surveyed its membership to better understand how they see the issue of climate change and to identify the resources they need to blend climate analysis into the investment process. According to the survey, about 75 percent of global C-level executives in the investment industry believe that climate change is an important issue, but only about 40 percent of all survey respondents currently incorporate climate change information into their investment process. This gap highlights the work needed in training and education at the investor level, as well as improvements in climate data availability and reliability that are needed before investors can adequately address climate-related risks.
The report concludes with a series of case studies for which CFA Institute partnered with global firms to provide investors with real-world examples of climate change analysis integration. These case studies cover equities, bonds, carbon markets, forestry as an asset, climate change engagement, portfolio-level climate analysis, and a host of other topics for the edification of the reader.
CFA Institute hopes that this report can be a useful educational tool for investors and analysts, helping them do the difficult work of properly valuing climate risks and opportunities. Investors and analysts have some catching up to do to properly value the externalities associated with climate change. Given the proper tools and information, the finance profession can help close that gap.
For more information about SASB’s approach to climate-related risks and opportunities, see our recent Climate Week webinar, “Accelerating Change via ESG Disclosure.”