Companies can no longer hide their climate risk. The Financial Stability Board (FSB) is helping to standardize the approach to reporting on climate-related risks and opportunities, imploring organizations to identify and strategize around climate issues and tell investors how they are making these determinations. A recent lawsuit against an Australian Bank for inadequate disclosure of climate risks, among other developments, demonstrate that stakeholders are taking climate-related transparency seriously.
The FSB’s Task Force on Climate-related Financial Disclosures (TCFD) released its final recommendations on June 29, 2017. This report concluded the private sector, industry-led TCFD’s 18-month initiative “to develop voluntary, consistent, climate-related financial disclosures that would be useful to investors, lenders and insurance underwriters in understanding material risks.” TCFD is set to continue its work until at least September 2018 and will focus on promoting and monitoring the adoption of the recommendations to improve climate-related disclosures within mainstream financial annual reporting.
TCFD recommendations were welcomed by the FSB, along with more than 100 companies that issued a statement of support. Other prominent supporters included 16 insurance supervisors and regulators, 11 major banks, Unilever, Dow Chemical Company, Tata Steel, PepsiCo, the “Big Four” professional services firms, ratings agencies Moody’s and S&P Global, and Royal Dutch Shell.
Canadian organizations supporting the recommendation include RBC, TD Bank, the Ontario Teachers’ Pension Fund, the Caisse de depot et placement du Quebec and the Canada Pension Plan Investment Board.
The TCFD’s final recommendations are largely consistent with the draft recommendations issued in December 2016 that structured the guidance around four categories: governance, strategy, risk management and metrics and targets. However, some updates and clarifications were made between the draft and final versions. Key amendments include:
Additional explanation on how TCFD recommendations fit in with national disclosure requirements
Clarification on which recommendations are subject to materiality assessment
Additional simplified guidance on scenario analysis
Expansion of guidance on remuneration to all organizations likely to be affected by material climate-related risks, previously applied only to the Energy Group
A change in the recommended metric for asset owner and asset managers from GHG emissions associated with investments normalized for every million of the reporting currency invested to a weighted average carbon intensity metric
Implementation of the recommendations. In the Annex to the Recommendations, the TCFD gives more detailed implementation guidance for financial sector organizations (banks, insurance companies, asset owners and asset managers) and nonfinancial sectors that TCFD deemed to be more likely financially impacted than others by climate-related risks (energy; transportation; materials and buildings; and agriculture, food, and forest products).
Scenario analysis. The use of climate change scenario analysis is one of TCFD’s key recommendations. In the Technical Supplement, TCFD promotes the increased use of scenario analysis to inform companies on how climate change impacts their business, strategy and financial performance. It indicates that this tool allows companies to consider a range of plausible future scenarios, both in terms of physical and transition risks, and formulate strategies accordingly. Such a tool is invaluable for planning in the face of uncertainty.
TCFD’s recommendations suggest that near-term and widespread adoption is necessary to ensure effective integration of climate-related financial risks and opportunities into organizations’ strategy and risk management processes. TCFD also emphasizes that leadership by the G20 and FSB is important for the successful implementation of the recommendations. As incoming president of the G7, Canada could play a role in promoting enhanced climate disclosure among G7 member countries.
Finally, while TCFD recognizes that organizations are still in the early stages of understanding and assessing how climate issues will impact them, it believes that integrating these issues into organizations’ mainstream financial reporting will foster the accelerated development of better practices, techniques and analysis.