In an open letter to government ministers co-ordinated by the Aldersgate Group, FairPensions argues that a clearer, stronger signal is needed now for the introduction of mandatory carbon reporting in the UK that is consistent with international standards.

Information about companies' greenhouse gas emissions, and their plans to reduce them, is a prime example of the kind of environmental data that institutional investors need if they are to play the role that policymakers increasingly expect of them. Without this information, it is difficult to see how investors can accurately factor in climate-related investment risks, or make investment choices that facilitate the transition to a low-carbon economy. Furthermore, many investors treat carbon management as a proxy for operational efficiency, making this information even more vital to the effective operation of the capital markets.

In FairPensions' most recent survey of fund managers, 86% said they would welcome statutory requirements on companies to report their greenhouse gas emissions, while 78% favoured stock exchange listing rules requiring companies to disclose climate-related risks. Interestingly, 72% also said they would welcome regulatory requirements on companies to reduce their emissions.

Last year, Defra published voluntary emissions reporting guidelines and is currently conducting a review into the case for introducing mandatory emissions reporting for all companies. Once this review is published, the Climate Change Act 2008 requires that the government must either introduce mandatory emissions reporting, or explain why they are not doing so. This decision is likely to be announced in November 2010.

The current voluntary guidelines only require companies to disclose their direct emissions, and emissions from purchased energy. We believe it is important that efforts are made to cover emissions from sources not directly owned and controlled by the company, such as outsourced operations ('scope 3 emissions'). The exclusion of significant scope 3 emissions gives only a partial picture of a company's carbon footprint, and may create perverse incentives to outsource. In the case of banks and investment management companies, it would create a bizarre situation whereby reporting was required on office overheads, such as lighting and paper usage, but not on the company's core business - ie. their shareholdings and other investments.

FairPensions recommends that mandatory reporting be introduced as a matter of urgency. We also recommend that reporting should cover companies' significant embedded, or ‘scope 3', emissions.

In the long term, we believe that the same transparency which investors are rightly demanding of their investee companies should be extended to investors themselves, through requirements to report on their total portfolio emissions. In the case of institutional investors who are constituted as companies, a requirement to report on significant scope 3 emissions would go some way towards achieving this. In the case of investors not constituted as companies - such as trust-based pension schemes - separate requirements would be needed.

The introduction of mandatory reporting for companies would dramatically reduce the burden of such requirements, as the information needed to make the calculations would be easily available. Having said this, some investors in jurisdictions without mandatory reporting for companies - such as the Australian VicSuper pension fund - already make efforts to report on their portfolio emissions.

Aldersgate Group letter | FairPensions' Policy Paper | Fund Manager Survey on Climate Change