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Task Force on Climate-Related Financial Disclosure

Consultation on Phase I Report. Letter submitted online and sent by email to:, 2 May 2016

2 May 2016

Phase I Consultation Comment Letter

We refer to the public consultation of 1 April 2016 on the Task Force on Climate-Related Financial Disclosure’s Phase I findings and report. We welcome the Task Force’s work to promote effective climate-related disclosures to support informed investment decisions and improve the understanding of the financial systems’ exposure to climate-related risk. For investors, the development of an overarching framework for the reporting and assessment of such risks is a priority. Generally, investors benefit from efficient price discovery and regulation that is relevant and adequate, but limited to what is necessary to facilitate and secure well- functioning markets.

Norges Bank Investment Management has provided comments to the specific questions of the online survey. Our comments in the survey reflect single items, areas or aspects we believe the Task Force should consider in its work. They do not constitute a conclusive response about how we believe effective climate-related disclosures should be undertaken. We would like to take this opportunity to comment more generally on the topic. We hope this can provide a brief context for our ongoing interest and survey response. The comments fall outside the direct questions asked in the survey, and therefore fall into the “other views” category as described in the consultation document.

Climate risk for asset managers

Norges Bank Investment Management is the investment management division of the Norwegian central bank (Norges Bank) and is responsible for investing the assets of the Norwegian Government Pension Fund Global (the fund). The fund is a long-term, globally diversified investor with minority equity positions in publicly listed companies and investments in listed fixed income instruments and real estate. As an investor, we depend on high-quality information to analyse markets, sectors and companies.

The challenges of climate change may give rise to risks and opportunities to companies. How companies manage these may drive long-term return for us as a shareowner. As part of the management of the fund, we have therefore focussed on various risks and aspects of climate change for many years.

To gain a better understanding of the fund’s potential exposure to climate change, we analyse greenhouse gas emissions from the companies in the equity portfolio. We have published analyses of such portfolio data since 2015. Not all companies report sufficiently standardised data. Our analyses are therefore based on extensive use of modelling by specialised data providers. We continue our efforts to develop our data sources and analyses of the fund’s climate risk. We believe there is a need for further analyses of climate risk at both company and sector level and for financial markets as a whole.

We support the development of standards, transparent methodologies and disclosure of consistent and objective data on current and future greenhouse gas emissions. In addition to this, we look at broader environmental information, such as water intensity and air pollution, or asset specific information, to complement risk assessments.

One way to attempt to reduce portfolio risk for long-term diversified investors is to seek improved strategic responses from companies. To aid our work we have published a climate change expectation document directed at portfolio companies. The expectation document is attached to this letter. In the expectation document, we outline how we expect boards to integrate climate change into strategy and investment planning, risk management, reporting and transparency. We promote corporate transparency of companies’ strategic response to climate change, their investment plans and the underlying assumptions of different climate change scenarios and measurement methodologies. We monitor companies’ reporting of climate change risk and carry out yearly assessments and portfolio rankings. In 2015, energy transition risk was a topic for selected engagements we carried out with coal miners and utility companies.

Materiality is the natural starting point for integrated reporting

Companies may affect the environment in numerous ways, some of which are not financially material. Although reporting more widely on environmental impact represents good practice for companies in many sectors, we believe that the materiality concept is the natural starting point for the integration of climate information in financial reporting. We therefore support the Task Force’s emphasis on materiality and believe the seven principles for climate-related risk disclosures formulated by the Task Force are appropriate.

The Task Force’s recommendations can contribute to a homogenous, appropriate and consistent reporting regime across jurisdictions or standards, and, as relevant, sectors and asset classes. Basing recommendations on an understanding of how the climate risk picture fits into regular financial or business risk reporting, management and analysis may provide the relevant context for future efforts by regulators, investors and companies. Providing a basis for a common measurement methodology would be a key step towards this. We would in this regard like to highlight the core role and ongoing efforts of the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB), the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC) and the Global Reporting Initiative’s (GRI).

Sectorial approach and qualitative strategy statements

We believe that sectorial guidelinesare necessary both to ensure that appropriate information is disclosed and to avoid an unnecessary heavy general reporting burden. In our response, we refer to some examples for various industries, including fossil fuels, utilities and the real estate/insurance/bank nexus. It is our view that a parsimonious set of consistent and comparable indicators, related to absolute and relative direct and indirect emission levels and future targets, as well as information about investment plans, underlying assumptions and selected asset-related information, could and should be achievable for most sectors. In addition to this, we believe that companies engaged in activities with large greenhouse gas emissions or intensities, should have a qualitative strategy addressing a transition to a low-emissions energy system, and be transparent about this.

Earlier in 2016, the Oxford Smith School of Enterprise and the Environment published a report on environmental risks in the value chain of thermal coal, commissioned by the fund. The analysis includes a forward-looking assessment of a number of environment-related risks facing coal companies. The authors comment that it is noteworthy that very little of our analysis has depended on existing corporate reporting or data disclosed through voluntary disclosure frameworks.” They go on to ask whether this demonstrates that existing frameworks on environment-related corporate disclosure might be asking the “wrong questions” and write that reporting needs to link back to a fundamental understanding of risk and opportunity and to specific assets within company portfolios.

The financial system’s exposure to climate risk

Finally, we would like to highlight that there are important differences in the sources, timing and channels of financial risks from climate change for the different areas of the financial sector. Investors in secondary markets will face different risks and opportunities than, for example, the mortgage banks or insurance companies. Retail investors or investors without defined liabilities will be exposed to other challenges than traditional pension funds or life insurers.

Underlying these analytical questions is the general challenge of the high level of uncertainty surrounding the timing and impacts of climate change, the channels through which it may affect the economy and, as the case may be, financial stability. The latter also has financial theory dimensions that have not been fully explored.

In our own work, we have made the support of further academic research into the financial economics of climate change a priority. A thorough understanding of the economy-wide and financial implications of climate change - and the appropriate weighing of impacts, costs and benefits – is necessary in order to arrive at a useful set of reporting items, within the right context. As a globally diversified long-term asset owner, this as an area of interest for us. We look forward to following the work of the Task Force and the publication of the Phase II report.

Yours sincerely

Petter Johnsen CIO
Equity Strategies                                                       

William Ambrose
Global Head of Ownership Strategies