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Are climate-related financial disclosures working?

It’s been just over a year since the Task Force on Climate-related Financial Disclosures (TFCD) released its final recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change. Tricarbon’s Damian Burton takes a look at how the recommendations are being adopted.

Climate-related financial disclosures

Back in 2015, the Financial Stability Board (the G20’s eagle-eye on the global financial system) established the TFCD to help companies better demonstrate responsibility and foresight in their consideration of climate change issues. The idea was that improved disclosure can help drive capital towards more sustainable investments, building a resilient economy. This time last year, the TFCD published its final report which focused on four key recommendations.

Universal recommendations

The recommendations are designed to help companies identify and disclose the potential financial impacts of climate-related risks and opportunities on their businesses, which in turn will help lenders, insurers and investors better assess and price those risks and opportunities. The recommendations are designed to be applicable universally, for businesses in any sector, in any country. They call for companies to disclose:

  • Governance: their governance around climate-related risks and opportunities
  • Strategy: the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning, where such information is material
  • Risk Management: how the organisation identifies, assesses and manages climate-related risks
  • Metrics and Targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities, where such information is material

The goal is for businesses to incorporate these four aspects into their normal public reporting processes, since the governance processes for these disclosures will be similar to those used for existing public financial disclosures and will likely involve review by the chief financial officer and audit committee. This robustness would enable lenders, insurers and investors to gauge a company’s resilience to climate change with confidence, whilst the business would also benefit from better intelligence, enabling it to adjust its strategies and processes to be more sustainable and future-proof.

Working on it

Perhaps unsurprisingly, the wider business community has yet to adopt the TFCD recommendations in earnest. Yes, there has been a rallying from corporates that see merit in disclosure, but the message is yet to hit home further afield. Just yesterday, the Financial Reporting Council published the 2018 Corporate Governance Code with the aim of achieving ‘long-term sustainable growth in the UK through strong relationships between companies, shareholders, and stakeholders’. Whilst this made some significant strides regarding diversity and gender, it made scant reference to the TFCD recommendations.

Why the footdragging? The vast majority of business sees climate change as a largely regulatory risk at present. The risks surrounding investment, asset management, supply chain and transition are recognised but deemed too small to be seriously addressed for now. Business is warming to the opportunity, but still reluctant to commit.

Tipping points

The clock ticks on. Disclosure seems set to be the preserve of the voluntary few without further intervention, but if the business risks and opportunities surrounding climate change are to be quantified for lenders, insurers and investors, some public regulation may be on the cards. A report to government by the Green Finance Taskforce recognises that only mandated reporting will generate comparable and comprehensive climate risk disclosures. It goes on to recommend that government ‘should set a deadline that it expects all listed companies and large asset owners to report on climate-related risks and opportunities in line with the TFCD recommendations on a comply or explain basis by 2022′. The nature of the UK compliance landscape in four years, post-Brexit, is tough to predict. Some common instruments will remain (ESOS, for example, is here to stay) but the emerging demand to report on climate risks may evolve. It’s encouraging that the universal nature of the TFCD recommendations gives them the resilience to outrun this short-term upheaval.

In all of this, let’s not forget that there is the very real prize of competitive advantage and long-term sustainable growth to be gained by business through disclosure. It isn’t easy to undertake effective scenario-analysis around climate change, and most businesses don’t yet have the risk management systems or committed leadership in place to make this happen. Yet we know this must happen and those early-movers will reap the benefits.

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