The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Accurate, comparable data about climate-related risks is critical to our ability to make more informed investment decisions on behalf of our clients. Because climate change will continue to affect society, economies, and markets, investors need this information to better price climate risks and fully assess the value of an issuer’s securities. Inadequate data and the absence of a standardized framework for disclosure currently limits our ability to evaluate the impacts of climate change (positive or negative) on our clients’ portfolios.
While companies continue to face new climate-related risks, the transition is not without opportunities. Government regulations, consumer preferences, litigation, and carbon pricing, for example, could affect an entity’s growth trajectory, margins, and value relative to peers. Addressing climate transition risks might help an entity realize strategic opportunities for growth or address vulnerabilities in its business model. Building resilience to physical climate perils such as flooding, drought, hurricanes, wildfires, extreme heat, water scarcity, or sea-level rise could help a company protect its facilities and workforce, maintain access to raw materials and energy sources, and ensure that its locations remain fit for purpose.
Insufficient information about these risks inhibits investors from correctly valuing an issuer’s securities, thus potentially paying too high or too low a price. Over the long term, understanding the comparative climate-risk-adjusted value of one entity over another may make a significant difference to financial returns. While meeting these disclosure expectations will require reporting entities to deepen their knowledge of climate impacts, we believe greater transparency will have significant long-term benefits for financial markets, including for the issuers of securities themselves, investors, and the millions of beneficiaries who rely on them.
To encourage the enhancement of climate disclosures, we share our views with policymakers and standard setters at the forefront of these efforts.
In June 2022, we submitted a second public comment letter to the US Securities and Exchange Commission (SEC) in support of its proposal to enhance and standardize climate-related corporate disclosures, including reporting on:
We believe that accurate, comparable information about climate risks, including Scopes 1, 2, and 3 emissions, is critical to our ability to make more informed investment decisions on behalf of our clients. Scopes 1 and 2 emissions alone do not enable us to assess an issuer’s transition risks. Disclosure of an entity’s emissions, inclusive of Scope 3 (which encompass all end-use emissions from a company’s upstream and downstream activities) is necessary for Wellington’s investors to develop a full picture of transition risk exposure for a company and its supply chain.
The value of a company with high Scope 3 emissions could suffer if an implicit or explicit carbon price materializes, for example, or if consumer preferences shift. Conversely, a company that innovates to reduce emissions from its operations and supply chains could see its long-term value increase. As for location data, we believe providing physical-asset location data is a crucial component of disclosing material climate-related risks. It is also a simple first step toward promoting climate-risk transparency.
Through our letters and dialogue with SEC commissioners and staff on multiple occasions, we have expressed why we believe transparency on these issues would enable us to more accurately value securities and make better investment decisions. As fiduciaries for our clients, we aim to manage overall financial risk in the portfolios we manage on their behalf; we believe emissions disclosures would help us to do that.
Our July 2022 letter to the International Sustainability Standards Board (ISSB) communicated our support for the standard setter’s efforts to set a global baseline for standardized disclosure of sustainability-related risks and opportunities. After reviewing the proposed draft, we expressed support for a baseline that centered on financial materiality, both for assessing enterprise value and focusing on industry-specific sustainability topics. Specifically, as in our letter to the SEC, we advocated for company disclosure of location data and explained the need for better, comparable Scope 3 emissions data. We also agreed with ISSB’s proposal to improve reporting on the use of carbon offsets. Finally, we told the ISSB that we believe it can address implementation and liability concerns of disclosing entities without compromising the integrity of the entity’s disclosures.
In August 2022, we submitted a public comment to the European Financial Reporting Advisory Group (EFRAG), expressing our views on the need for sustainability reporting standards and standard definitions within that reporting. We urged EFRAG to consider using the ISSB’s standards to ensure interoperability across its jurisdictions and comparability across companies. While we recognize the different disclosure needs of investors globally, we believe the interoperability of sustainability-disclosure requirements is critical for investors to appropriately use these disclosures.
The current sustainability-disclosure landscape is complex and fragmented. It is costly for disclosing entities and difficult for investors to access at scale. Ensuring interoperability of standards is crucial for avoiding the creation of parallel-disclosure frameworks that would exacerbate current challenges. We recommended that disclosure standards define and consistently use threshold requirements for key terminology, including terms like “material,” “enterprise value,” and “short, medium, or long term.”
In addition to these efforts, we continue to contribute to other initiatives as an advocate for climate-related disclosure requirements. We are currently providing our perspectives to the Glasgow Financial Alliance for Net Zero (GFANZ). Our case study is included in GFANZ’s recent report, “Expectations for Real-economy Transition Plans.”
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