What is the issue?
Several studies and surveys have identified the major barriers preventing adequate integration of climate risk into the mainstream financial sector as follows:
- skepticism or inadequate consideration of the financial materiality of climate change
- risks, which results in the mis-categorisation of climate change as a ‘discretionary’
- environmental, social and governance (ESG) issue;
- a focus on short-term returns throughout the financial system;
- uncertainty surrounding the content of legal and professional duties and a persistent confusion around of whether fiduciary duties permit (let alone require)
- consideration of climate change risks; and
- crucial regulatory bodies in the UK (including the Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC)) have arguably succumbed to regulatory capture and fail to prioritise enforcement in the interests of investors, consumers and the general public.
The recent studies on the legal duties of fiduciaries provided a ground-breaking and important analysis of the scope of the legal duties of fiduciary investors and the requirement to integrate long-term ESG value drivers. This research, however, reveals a relatively limited penetration of this legal analysis within the mainstream investment industry. Furthermore, this work focused on the duties of fiduciaries, and did not consider the legal obligations or the scope of the duty of care owed by other professional advisors or key actors in the financial sector. We propose to address this knowledge gap and use the law to support penetration of this analysis into the mainstream.
What will the project try to achieve?
Through targeting the professional advisors to the financial sector (actuaries, auditors, investment consultants), the organisation will contribute to a greater appreciation of the materiality of climate risk across financial markets, and the integration of this into decision making. This will lead to a reduction in risk across the economy and a shift from carbon intensive investments towards greener investments that support the transition to a low carbon economy.
The overarching outcome of the project is to encourage a shift towards a cleaner, more sustainable and more resilient economic system that is well prepared for the risks of climate change, fully integrates environmental externalities and does not simply pass costs on to future generations. Equity is at the core of the climate change debate, it arises at varying scales of governance (international, state, local) and across generations. Economic resilience is relevant across scales of governance and generations (particular for pension funds). Consequently, increasing the adaptive capacity of key financial actors to manage the risks and opportunities of climate change is paramount to reducing harm to the most vulnerable sectors of society.
Who might be interested in this project?
The project will target various groups of stakeholder that will be interested in the outcomes of the project: professional advisors, company directors, asset managers, investment consultants, pension fund managers, actuaries, shareholders, policy makers, and general public.