The imperative of company-reported data in managing transition risk

In an era where climate-related financial risks are increasingly shaping investment landscapes, the quality and source of data informing investment decisions has never been more critical. Transition risk – as defined by the Task Force on Climate-related Financial Disclosures (TCFD) and incorporated into the IFRS S2 standard – represents the financial risks associated with the shift toward a low-carbon economy. For asset owners and fund managers alike, accurately assessing and managing this risk hinges on the reliability of the underlying data.

The pitfalls of public and assumed data

Relying on “observed” public data or sector-based assumptions can lead to misinformed risk assessments. Public data sources often lack granularity and may not reflect the most recent operational changes within a company. Assumptions based on industry averages can be misleading, as they overlook company-specific initiatives or exposures that differentiate one entity from another within the same sector.

The value of company-reported data

Company-reported data, sourced directly from the organisations themselves, offers a more accurate and timelier snapshot of their current risk profile and transition strategies. This data encompasses specific metrics on greenhouse gas emissions, energy usage, and climate-related initiatives that are crucial for evaluating a company’s alignment with global sustainability goals.

By utilising company-reported data, asset owners and fund managers can:

• Enhance risk assessment accuracy: Obtain precise information that reflects the company’s actual risk exposure and mitigation efforts.
• Improve investment decisions: Make informed choices that align with both financial objectives and sustainability commitments.
• Facilitate compliance: Meet the reporting requirements set forth by TCFD and IFRS S2, which emphasise transparency and disclosure of climate-related risks.

Shared responsibility in the investment chain

Asset owners bear the ultimate responsibility for managing transition risk within their portfolios. However, the indirect nature of their investments – often held through external fund managers – introduces layers of separation between them and the underlying companies. This structure necessitates a collaborative approach to data acquisition and risk management.

Asset owners must actively engage with their fund managers to:

• Advocate for direct engagement: Encourage fund managers to obtain company-reported data directly from investee companies.
• Set clear expectations: Define mandates that prioritise sustainability metrics and transparent reporting.
• Monitor and review: Regularly assess fund managers’ efforts in sourcing and utilising company-reported data.

Conclusion

Navigating the complexities of transition risk requires a foundation built on accurate, company-reported data. As stewards of capital, asset owners and fund managers have a shared responsibility to bridge the data gap. By fostering direct lines of communication with underlying investments and prioritising transparency, they can better manage risks, fulfill regulatory obligations, and contribute to a sustainable financial future.