ESG and Climate Risk Reporting in the Channel Islands

Sustainable finance, ESG and Climate Risk reporting in the Channel Islands

Mandatory Disclosures, where are we heading?

Dr Andy Sloan, MD, Netherite & Grundweldt Advisory

Introductions Dr Andy Sloan MD, Netherite & Grunweldt Advisory Founder, International Sustainability Institute Channel Islands IPCC AR6 Expert Reviewer Past roles Established Guernsey Green Finance Deputy CEO, Guernsey Finance Director Financial Stability & International Policy Advisor, GFSC States Economist, Fiscal and Economic Policy Advisor andysloan@netheriteandgrunweldt.com andysloan@isici.org

www.netheriteandgrunweldt.com

Session outline ESG ‘trends’ Historic backdrop Task Force On Climate Related Finance Disclosures & Climate Reporting EU & UK Approach International regulatory themes Channel Islands

ESG trends and developments

(Source: Impact Investing Institute Jan 2022) •Traditionally, investment decision-making was based solely on financial factors – to maximise risk-adjusted financial returns •Increasingly, ESG factors influence investment – driven by consumer demand and regulation, mainstream asset managers and other financial firms are integrating ESG into their business proposition •Global assets applying ESG data to drive investment decisions have almost doubled over 4 years, and more than tripled over 8 years, to $40.5 trillion in 2020 [Source: Pensions and Investments]  Assuming 15% growth, half of the pace of the past five years, ESG assets could exceed $50 trillion by 2025- representing more than a third of the $140.5 trillion in projected total global AUM. [Source: Bloomberg]

•COP26 and the recent report of the UN Intergovernmental Panel on Climate Change (IPCC) support the urgent need for green investment and solutions •Sustainable Finance has become a pillar of economic policy – harnessing the power of investors to support environmental and social good”

2015 CoP 21 175 Nations Covering 88% of Greenhouse Gas Emissions

2016 UN Sustainable Development Goals

2017 Task Force on Climate-related Finance Disclosures • Governance • Strategy • Risk management • Metrics & The TCFD offers a set of recommendations regarding climate-related financial disclosures.

It provides four key recommendations covering governance; metrics and targets; targets strategy; and risk management, which can be followed by an organisation. Each recommendation includes associated and specific recommendations for disclosure.

Climate reporting

(TCFD Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans) Strategy • Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material. a) Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term. b) Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning. c) Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.

Climate reporting

(TCFD Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans)

Guidance Template Spreadsheet

Climate reporting

(TCFD Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans)

Metrics and Targets • Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

• a) Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process.

• b) Disclose Scope 1,Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks.

• Asset owners should disclose the appropriate financed-emissions metric, based on PCAF’s methodology and WACI, if relevant, or a comparable methodology, for their industry where data are available or can be reasonably estimated.

If a comparable methodology is used, the TCFD recommends the details of such methodology be made publicly available.

Climate reporting

(GHG Accounting & Reporting Standards for the Finance Industry, Partnership for Carbon Accounting Financials)

EU approach

Benchmarks

Regulations

Taxonomy

EU’s Sustainable Finance Disclosure Regulation at a glance  Entity & product level  Principal Adverse Impact Statements  Article 6, 8, 9 Funds

2023

ESMA Amend Article 8, 9 Funds

UK approach extend the application of its TCFD-aligned Listing Rule for premium-listed commercial companies to issuers of standard listed equity shares introduce TCFD-aligned disclosure requirements for asset managers, life insurers, and FCA-regulated pension providers, with a focus on the information needs of clients and consumers

SDR  At the entity level, firms will need to report how they take climate-related risks and opportunities into account on behalf of their client assets, including governance, strategy, risk management, metrics and targets.  Product-level disclosure consists of a baseline set of mandatory carbon emission and carbon intensity metrics, and any governance, strategy or risk measures that differ from the entity-level disclosure.  In addition to these reporting requirements, firms must carry out regular scenario analysis at both entity and product level to test their portfolios against different climate issues.

Asset management sector (expected coverage 98% plus of AUM) Phase 1: asset managers of over £50bn and asset owners with over £25bn commencing on 1 January 2022, with the first publication deadline of 30 June 2023.

Phase 2: smaller firms with over £5bn of assets, comes in on 1 January 2023, with reporting due by 30 June 2024.

Pensions sector (similar requirements to asset management) The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 came into effect on 1 October 2021 for schemes with over £5bn of assets.

Schemes with between £1bn and £5bn need to comply from 1 October 2022.

UK Reporting: ESG principles (FCA ‘Dear Chair’ letter 2021) •

A fund’s ESG/sustainability focus should be reflected consistently in its design, delivery and disclosure. A fund’s focus on ESG/sustainability should be reflected consistently in its name, stated objectives, its documented investment policy and strategy, and its holdings.

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References to ESG (or related terms) in a fund’s name, financial promotions or fund documentation should fairly reflect the materiality of ESG/sustainability considerations to the objectives and/or investment policy and strategy of the fund.

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The resources (including skills, experience, technology, research, data and analytical tools) that a firm applies in pursuit of a fund’s stated ESG objectives should be appropriate. The way that a fund’s ESG investment strategy is implemented, and the profile of its holdings, should be consistent with its disclosed objectives on an ongoing basis.

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ESG/sustainability-related information in a key investor information document should be easily available and clear, succinct and comprehensible, avoiding the use of jargon and technical terms when everyday words can be used instead. Funds should disclose information to enable consumers to make an informed judgement about the merits of investing in a fund.

Periodic fund disclosures should include evaluation against stated ESG/sustainability characteristics, themes or outcomes, as well as evidence of actions taken in pursuit of the fund’s stated aims.

International

Some key regulatory themes • Measurement and Reporting: • Climate related with a focus on risk – Task Force for Climate-related Financial Disclosures (TCFD) – established by the Financial Stability Board – is the building block on climate reporting for corporates, banks, asset managers, insurance companies, pension schemes • EU Taxonomy + SFDR (for financial firms) – with new Corporate Sustainability Reporting Directive using “double materiality” approach to come • Global convergence –IFRS Foundation recently announced the formation of the new International Sustainability Standards Board (ISSB) which will sit alongside the accounting standard setter • With Brexit, the UK will follow its own path – but has signalled equal ambitions with Roadmap for the Sustainability Disclosure Requirements (SDR) • EU ESG integration: • EU delegated acts UCITS/AIFMD: ESG integrated into fund governance, investment due diligence, staffing, risk management • Distribution and the client relationship: • MiFID 2 – ESG preferences inform suitability • Product Governance

Channel Islands Prescribed notification and disclosure regime 2018 (world’s first) Revisions to Codes of Practice & Jersey Private Fund Guide 2021 Revisions to the Corporate Governance Code 2021 ‘5.2.1 Climate Change The Board should consider the impact of climate change on the firm’s business strategy and risk profile and, where appropriate in the judgement of the board, make timely climate change related disclosures.’

So what lessons can be learnt from all that? ;-) www.netheriteandgrunweldt.com