Norges Bank Investment Management (NBIM) has told the UK government that any new rules it is planning to improve the country’s audit and corporate governance framework should include a requirement for listed companies to address climate risks in their reporting.
NBIM, which manages the NOK11.8trn (€1.14trn) Norwegian Government Pension Fund Global (GPFG) was replying to a consultation on a UK policy document dated 18 March 2021 outlining proposals “to hold directors of the largest companies to account, to establish clearer responsibilities on detection and prevention of fraud, to empower shareholders and to increase choice and quality in the audit market”.
Carine Smith Ihenacho and Peter Alexis Wegerich – respectively chief corporate governance officer and senior economist at the sovereign wealth fund manager – wrote in a letter to the UK Department for Business, Energy and Industrial Strategy: “We recognise the potential impacts of climate-related risks on companies’ profitability, and see the benefits of considering these factors in the resilience statement.”
The GPFG owned £62.6bn (€73.1bn) of UK equity and bonds at the end of 2020.
The pair said company accounts were central to NBIM’s investment analysis, and deficient audit quality posed financial risks to investors and undermined trust in financial markets.
“We are therefore encouraged by the broad ambition expressed in this consultation regarding the purpose of audit and support the proposal that auditors should consider relevant director conduct and wider financial information in reaching their judgements,” the duo said.
They said they welcomed the proposal to require company directors to produce an annual resilience statement addressing challenges to the business model over the short, medium and long term, including risks posed by climate change.
“We expect companies to identify and include material short, medium and long-term climate change risks in a robust and integrated risk management framework, and to align disclosures with applicable reporting standards, in particular the recommendations by the Taskforce on Climate-related Financial Disclosures (TCFD),” said Smith Ihenacho and Wegerich.
For companies that already reported in full alignment with the TCFD’s recommendations, the NBIM employees said it might be enough just to summarise their TCFD reporting in the resilience statement to avoid an undue reporting burden.
“Conversely, for companies who have yet to disclose in accordance with the TCFD recommendations, a discussion of climate risks in the resilience statement could serve as a starting point, although not a substitute, for further developing their TCFD-aligned reporting,” they said.
In its consultation document, the UK government said it agreed with the independent Brydon Review of 2019 that the content in the long-term section of the resilience statement should not in general be prescribed – but it has been canvassing views on whether the impact of climate change should be specifically addressed.
Earlier this year, the UK government set out its plans to require companies and LLPs with more than 500 employees to disclose climate-related financial information in line with the four overarching pillars of the TCFD recommendations.
But the proposals were criticised as by pension fund and institutional investor groups as falling short in several respects.
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