A senior figure at Norges Bank Investment Management (NBIM) has said climate transition plans are becoming an important tool for valuing portfolio companies.
Elisa Cencig, NBIM’s head of policy engagement, said it is “very clear that climate risks and opportunities are financially material, and observable across major asset classes, including equity and corporate debt”.
Those risks, which include the physical impacts of climate change on assets and business models, and the effects of decarbonisation efforts by firms, consumers and policymakers, can “significantly impact their value,” Cencig added.
However, companies don’t disclose them in their financial statements, making it difficult for investors to understand key risks like the depreciation of assets that may not be viable in a low-carbon economy.
“The other important [consideration] is the strategic planning and risk assessment,” said Cencig, who was speaking at a webinar about European Union sustainable investment policy, hosted by the London Stock Exchange Group.
She explained that having forward-looking information and plans helps investors evaluate how companies are positioned when it comes to climate risks and opportunities.
“We’re using transition plans not just for company engagement and voting,” Cencig told the audience. “They also inform investment decisions, by showing how credible the decarbonisation strategies of our portfolio companies are.”
She said it was particularly important for investors to understand how firms were allocating their capital and resources to manage climate change, including Research & Development and capital expenditure.
Earlier this month, the European Commission’s advisory body on sustainable finance proposed that the EU Taxonomy Regulation was overhauled to reduce its burden on companies.
One of the key recommendations was that capital expenditure and R&D should be made priority areas in the disclosure requirements, while expectations around turnover and operational expenditure should be reduced.
Cencig stressed that policymakers should seek to reduce fragmentation as they introduce rules for climate transition plans.
Another set of Commission advisors, EFRAG, is developing standards for companies disclosing information about their decarbonisation plans under the EU Corporate Sustainability Reporting Directive (CSRD).
Some investors are concerned that EFRAG is deviating from best-practice guidance already developed by the Transition Plan Taskforce (TPT) – a body created by the UK government, but whose output is now owned by the same group that oversees the International Sustainability Standards Board (ISSB).
“We are really hoping that EFRAG can use the global baseline provided by the TPT material for their own purposes,” said Cencig.
“Having global and comparable disclosures about transition planning […] is necessary to address the existing lack of comparability and fragmentation that we’re seeing across our holdings and across companies,” she added.
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