Climate change poses physical risks to our investments, and the scientific evidence shows that this risk is increasing. Moreover, the economic analysis of climate change is increasingly highlighting the heavy costs that society will pay from delayed action, as well as the relatively moderate costs of immediate action.
As the world decarbonises, companies are beginning to recognise the potentially material headwinds they face. Yet few of them are reflecting these risks in their financial statements. Likewise, hardly any of them detail the extent to which they might be affected by physical impacts from climate change in their annual reports to shareholders. This needs to change.
We are currently engaging with regulators to ensuring proper reporting on material climate risks, how they could impact the long-term delivery of value for shareholders, and how the stated long-term strategy ensures the business navigates these risks. This is a prerequisite for prudent and long-term capital stewardship, and crosses over with our work on audit and accounts.
In January this year, we worked with other investors to send letters to the managing partners of the UK arms of the Big 4 audit firms: PWC, KPMG, EY and Deloitte. The letters set out expectations that auditors ensure material climate risks are incorporated into company accounts, alongside more detailed disclosures in the narrative reports to shareholders as recommended by the Task Force for Climate-related Financial Disclosures (TCFD).