The latest news and views from Gibson Lamb

The place for updates on financially significant world events; our views on market developments; and news about our approach to doing business, including our focus on sustainability.

Investment Insight Series – Paris-Aligned Accounts

Investment Insight Series

By

Date published

We talked last time about the Paris Agreement and the way it forms another framework for our responsibly managed portfolios alongside ESG and the SDGs. Off the back of this, we thought some recent activity, spearheaded by Sarasin, might be of interest.

One of the key reasons we have selected Sarasin as our responsible investment partner is that we wanted to be able to inform you how your capital was being used ‘for the greater good’ – what difference are you making? What are they doing for their ongoing fees? 

Written by Sarasin’s Head of Stewardship, Natasha Landell-Mills, the paper Investor Expectations for Paris-aligned Accounts was published by the Institutional Investors Group on Climate Change (IIGCC) last month. The main thrust of it is setting out the expectation that directors and auditors deliver accounts that properly reflect the impact of achieving net zero emissions by 2050 on assets, liabilities, profits and losses. There’s a link below should you wish to read the whole thing. 

The suggestion is that only when company accounts show an accurate picture of the implications of acting on the Paris Agreement goals will management, investors and creditors have the information they need to deploy capital in a way that’s consistent with the climate accord. It is argued that financial statements that leave out material climate impacts misinform executives and shareholders, resulting in misdirected capital.  

Like pilots attempting to fly without properly functioning instruments, company leaders without correct cost and return information are likely to take the wrong path. In the case of climate change, the results of this are not only harmful for shareholders but also potentially disastrous for the planet.  

Think about a coal power company. Their accounts need to recognise escalating carbon taxes; the falling costs of competing renewable energy; potential impairments in fossil fuel-dependent assets and so on. There’s currently little evidence that companies are taking decarbonisation or the physical impacts from climate change into account as they draw up their financial statements. Apart from a few notable exceptions, auditors are likewise currently silent on whether financial statements are ‘climate-proof’. 

With this in mind, Sarasin & Partners have joined with a group of long-term investors including Aegon, Fidelity, J. P. Morgan and M&G to send copies of their report to the audit committee chairs of thirty-six of Europe’s largest companies. Recipients included EDF, Anglo American, Airbus, Volkswagen and Shell.  

The group have suggested that companies use the paper as a guide for ensuring material climate risks are fully incorporated into their financial statements. They made it very clear that where directors fail to deliver on these expectations, investors are committed to acting through engagements, voting and – in certain cases – divestment. 

It will be interesting to see what responses come out of this action but if nothing else, the threat of divestment is certainly one we imagine most of the recipients would rather avoid. The signatories to the letter look after US$9 trillion in assets so any threat of divestment is significant. 

Perhaps this is a sign of things to come with pressure to take appropriate climate-related action coming not just from governments but, potentially more significantly, from peers and stakeholders. 

We plan to publish one more Investment Insight before Christmas. Please let us know if there is anything specific you would like us to cover in this series. 

Download the IIGCC’s report on ‘Investor Expectations for Paris-aligned Accounts’ here.