Executive summary

Investment managers¹ are in a unique position to help channel investments to sustainable activities. Many investment managers have joined Governments, other corporates and financial services firms in making commitments to reach net zero greenhouse gas (GHG) emissions by 2050.

Net zero means reducing GHG emissions to as close to zero as possible, with any remaining emissions reabsorbed from the atmosphere e.g. by forests or oceans². Reducing emissions significantly to reach net zero by 2050 is necessary to limit global warming to 1.5 degrees above pre-industrial levels, in line with the goals of the Paris Agreement.

Meeting net zero commitments will require a transition to a fundamentally different and more sustainable economy. Investment managers will need to transform their entire organisation across their business strategy, products and services, investment decision-making, risk management, and operations.

To mitigate the worst effects of climate change, action is needed now. Regulators, supervisors, and wider stakeholders increasingly expect investment managers to develop, disclose and execute credible transition plans.

A transition plan is an aspect of an organisation’s overall business strategy that sets out targets and actions supporting its transition toward a low-carbon economy, including actions such as reducing its GHG emissions³. Where a firm has made a net zero commitment, its transition plan should target a pathway in line with this commitment.

While net zero commitments may have initially emerged from corporate strategy or corporate responsibility teams, individuals across the firm will need to play their part in order to meet them. The Board will need to approve the transition plan and targets and oversee transition plan execution, while senior managers will have responsibility for execution of the plan and managing the associated risks. Each of the three lines of defence will have its own set of responsibilities.

As part of this, Risk and Compliance functions will have an important role to support their firm in the transition. They can help position their firm for the future, both in terms of competitiveness and resilience, as well as mitigate the reputational, conduct, regulatory and liability risks that may arise from failing to deliver against transition plan targets, poor plans, or poor disclosures.

This report is co-authored by Deloitte and the Investment Association. It considers regulatory developments on transition plans and how Risk and Compliance functions can support the journey to net zero across the following six themes.

1. Credible net zero plans

The credibility and business implications of transition plans will face increasing supervisory and stakeholder scrutiny.
Risk and/or Compliance must advise the wider firm on regulations, expectations and guidance on transition plans and engage actively with policymakers, regulators, standard-setters, and industry bodies. They will need to support the development of the transition plan and create policies, procedures, and controls to monitor adherence to the plan on an ongoing basis, escalating concerns proactively.

2. Governance, culture, and incentives

There should be a clear sense of purpose and alignment across the transition plan, climate strategy, business strategy, product range, risk appetite, risk management, culture, and incentives. Firms’ governance structures and culture should be effective in cascading the transition strategy and plan horizontally and vertically throughout the firm, with responsibilities allocated clearly across the three lines of defence.
The CRO and CCO should have a seat on relevant Committees, to give them a voice in developing the transition plan, and in providing second line oversight on adherence to the plan. Risk and/or Compliance should provide the Board and relevant Committees (e.g., the Risk Committee, Risk and Compliance Committee, and Investment Committee) with robust management information (MI) on delivery of net zero plans and performance against KPIs, metrics and targets.

3. Climate risk management	A credible transition plan will help investment managers with their work on climate risk management by reducing exposure to transition, liability, litigation, and reputational risks. Investment managers can also leverage their risk management frameworks to support the net zero transition. Risk and/or Compliance should identify and integrate climate risks into the risk management framework and ensure the strategy on climate risk management is aligned with the transition plan. They should also identify and address gaps in knowledge, skills and experience on climate change and related risks within their own teams.
4. Greenwashing	Ensuring accurate and compliant disclosures on net zero transition plans, firm-wide climate policies, emissions, and products will support the net zero transition, as well as reduce liability, litigation and reputational risks and help to prevent greenwashing. Risk and/or Compliance should support their firm in the development of a robust climate data strategy, data governance and target operating model. They should leverage existing control frameworks to ensure that there are processes, policies, and controls in place to monitor funds which promote or target climate characteristics across the product lifecycle.
5. Treatment of customers	Investment managers have a pivotal role in supporting their institutional clients and retail customers with their climate ambitions and/or preferences. Risk and/or Compliance should ensure customers are treated fairly as investment managers’ product offering changes. They should ensure that climate considerations are incorporated into product governance, where required.
6. Thinking about ESG holistically	As there are more funds which promote or target sustainable or ESG characteristics than solely climate characteristics and many regulatory requirements or supervisory expectations include broader environmental or ESG considerations in their scope, investment managers will need to think about ESG holistically. Risk and/or Compliance should consider how to integrate nature considerations into the risk management framework, product range, and investment decision-making processes. They should also ensure that fund documentation and client disclosures are clear on how they will treat trade-offs between “E”, “S” and “G”.