The Determinants of Climate Change Risk Practice and Disclosure: An Analysis of Institutional Investors in the UK Using a Mixed Method Approach
The impacts of climate change (CC) are becoming increasingly tangible, manifesting in severe droughts, dwindling water resources, intense wildfires, polar ice melt, rising sea levels, flooding, loss of biodiversity, and extreme weather events (United Nations, 2024). As key players at the top of the investment value chain, institutional investors hold a pivotal role in mitigating and disclosing climate-related risks within their portfolio companies. These investors are under mounting pressure from regulators, policymakers, societies, and the media to incorporate climate considerations into their investment decisions to help mitigate the drivers of CC within the firms they invest. This thesis examines how institutional investors in the UK integrate CC risk into their investment management processes. It does so through a comprehensive review of their publicly available reports and an exploration of their perceptions on climate risk. A mixed-methods approach was employed, comprising both quantitative and qualitative analyses. Quantitatively (a deductive approach), content analysis was conducted on 272 institutional investors' reports, leading to the development of a CC index specific to institutional investors. A regression analysis was then performed to identify the determinant factors influencing CC risk management and disclosure and to examine the relationship between these determinants and the level of disclosure. Qualitatively (an inductive approach), 10 in-depth, semi-structured interviews were conducted with institutional investors, based in the UK, to explore their perceptions and attitudes towards CC risk practices and disclosures. The findings reveal significant variation in the approaches and strategies institutional investors employ in relation to CC risk management and disclosure, underscoring the need for greater transparency in the sector. Notably, institutional investors who are signatories to professional climate-related initiatives, particularly the CDP, demonstrate a stronger correlation with more comprehensive CC practices and disclosures. Additionally, factors such as assets under management, asset diversification, and the geographical location of headquarters are significantly correlated with higher levels of CC disclosure. However, institutional investors face several barriers, including inadequate standardised reporting frameworks within investee companies, technological challenges, regional disparities, and knowledge gaps of CC, which hinder effective CC risk integration and reporting. This research contributes to a better understanding of the strategies institutional investors employ to manage climate-related risks and the extent to which these strategies influence their investment activities. Following stakeholder-agency theory provides a novel perspective by shifting the focus from traditional corporate governance (see Hill and Jones, 1992) to the role of institutional investors in managing CC risks practice and disclosure. It illustrates the dual role of institutional investors as responsible stewards and agents (fiduciaries), who balance stakeholder interests with profit maximisation. This balancing act is essential not only to mitigate climate-associated risks but also to foster long-term value creation.
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