The Local Authority Pension Fund Forum (LAPFF) and Sarasin & Partners have publicly challenged the views of an academic amid an ongoing stewardship dispute over how investors expect banks to account for climate risk.
In a joint letter, LAPFF and Sarasin argued that expected losses arising from the low-carbon transition should be properly reflected in banks’ accounts to protect long-term capital.
The response follows a letter from Lisa Sachs, director of the Columbia Centre on Sustainable Investment, who questioned whether banks should be expected to account for transition risks in the way investors are demanding.
Sachs argued that regulators should instead focus on removing barriers to making clean energy the cheaper and more financially viable option.
LAPFF and Sarasin responded: “Sachs is right that government policies need to promote lower-carbon energy. But it would be unwise to ignore banks’ mispricing of climate risks.”
“Real economic costs from climate change must be accounted for to protect long-term capital; this matters to ensuring sustainable economic growth and long-term returns for investors,” they added.
The exchange highlights differing views among institutional investors and academics over how climate risks should be reflected in banks’ financial reporting.
Separately, a paper from the Columbia Centre on Sustainable Investment, co-authored by Sachs, argued that the transition to a low-carbon economy is being undermined by muddled thinking about who is responsible for managing climate-related risks.
Failure to identify risk
LAPFF and Sarasin also said: “Banks are already required under accounting rules to take a forward-looking approach to expected credit loss modelling precisely to ensure they anticipate economic risks, rather than ignore them. Equally, prudential regulation is intended to anticipate risks to ensure the safety and soundness of the system. This applies to any emerging risk, whether related to private credit, cyber or climate.”
The debate follows an investor campaign targeting HSBC earlier this year, in which a group of asset owners and asset managers argued that expected climate-related losses were not being adequately recognised in the bank’s financial statements.
Senior figures at AkademikerPension, NEST and Merseyside Pension Fund called on regulators to investigate HSBC and PwC over their accounting treatment of climate risks.
In a letter to the UK’s Financial Reporting Council (FRC), coordinated by Sarasin & Partners, the investors said they were concerned that HSBC’s financial statements might not properly capture material climate risks, in line with the Companies Act requirement that accounts provide a “true and fair view”.
LAPFF and Sarasin added: “Banks and prudential regulators’ failure to pre-emptively identify and act on risks building in banks’ balance sheets was dramatically exposed in the 2007/8 financial crisis. We should not make the same mistake again.”
