Governance, culture, and incentives

Actions for Risk and Compliance functions

Actions for Risk and Compliance functions

Governance, culture, and incentives

To align priorities across the firm, there should be a clear sense of purpose and alignment across the transition plan, climate strategy, business strategy, product range, risk appetite, risk management, and culture.

Firms’ governance structures and culture should be effective in cascading the transition strategy and plan horizontally and vertically throughout the firm, with responsibilities across the three lines of defence.

According to TCFD guidance, a firm’s transition plan should describe the approval process, and oversight and accountability responsibilities within an organisation, including the role of the Board and senior management in overseeing the plan. GFANZ guidance, which is under consultation, highlights a broad range of functions that will have responsibilities in relation to the net zero transition²⁴. The plan itself should be periodically reviewed and updated and the Board should receive regular status updates.

A change in culture and mindsets at all levels in the firm will be important so that staff do not view the transition as a box ticking exercise. Behavioural examples and cultural signals sent by employees’ immediate managers or supervisors should support the transition strategy and the culture should encourage staff to speak up, share opinions and ideas, and acknowledge errors without fear.

One important cultural shift will be for portfolio managers, who will have additional constraints placed upon their investment decision-making in support of the firm’s net zero commitment.

Firms should also consider how remuneration and other incentives are aligned with the organisation’s climate goals, so as to minimise the scope for conflicts. Any residual conflicts should be identified and managed.

Actions for Risk and/or Compliance

Ensure that the CRO and CCO 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.

Be alert to the potential for a culture to develop where staff seek to ignore or circumvent transition plan actions, for example, where they do not support constraints placed on investment decision-making.

Provide the Board and relevant Committees (e.g., the Risk Committee, Risk and Compliance Committee, and Investment Committee) with robust MI on delivery of net zero plans and performance against KPIs, metrics and targets. There should be metrics across all asset classes for which targets have been set. MI should focus on where exposures across AUM are greatest to high GHG emitting companies or sectors. MI design should be sufficiently flexible so that it can be augmented at a later stage as necessary. MI should be clear on gaps and uncertainties in data, with an ongoing process to address them.