What new climate risk financial disclosure rules mean for companies

The Recommendations of the Financial Stability Board Task Force on Climate-related Financial Disclosures (FSB TCFD) were published yesterday. So what does it actually mean? Here’s a round up of initial news coverage of the recommendations. If you want to go straight to source, the FSB TCFD website has the full recommendations, and documents including video, press release, full report, annex on implementing the recommendations, technical supplement on use of scenario analysis, and public consultation.

Bloomberg & Carney: all taskforce members have announced support for the recommendations, the pair reveal in an opinion article in the Guardian (How to make a profit from defeating climate change, Mark Carney and Michael Bloomberg, The Guardian). The pair write: ‘The challenge is that investors currently don’t have the information they need to respond to these developments. This must change if financial markets are going to do what they do best: allocate capital to manage risks and seize new opportunities. Without the necessary information, market adjustments to climate change will be incomplete, late and potentially destabilising.’ … ‘We believe that financial disclosure is essential to a market-based solution to climate change. A properly functioning market will price in the risks associated with climate change and reward firms that mitigate them. As its impact becomes more commonplace and public policy responses more active, climate change has become a material risk that isn’t properly disclosed.’ … ‘We are pleased that all taskforce members, companies with market capitalisation of $1.5tn and financial institutions responsible for assets of $20tn, have announced their support for the disclosure recommendations. We encourage others to participate in the consultation, to become early adopters thereafter, and to encourage the companies in which they invest to also make the disclosures.

In the accompanying Guardian news article, Larry Elliot writes that ‘Mark Carney says a new set of guidelines drawn up over the past year should be implemented so that investors can allocate capital to those companies with the best ideas to hit the target of keeping the rise in global temperature to less than 2C.’ (Mark Carney: firms must come clean on exposure to climate change risks)

Recommendations should become common practice, but regulators urged to do more: The Financial Times writes that ‘The task force wants companies’ financial reports to include a discussion of the impact of both specific climate change scenarios and the carbon-reducing policies which are designed to combat them. Although the FSB cannot force companies to adopt the recommendations, it hopes that they will become common practice across a wide range of sectors.’ (Carney-backed report urges companies to disclose climate change impacts, Oliver Ralph, Financial Times). The piece also highlights that companies are already legally required to disclose material risks, including climate change risks. ‘It is already evident that financial regulators are not providing adequate oversight of climate-related risk disclosures and enforcement’, ClientEarth’s Alice Garton told the FT.

CEO Pay should be linked with climate change risks: according to Bloomberg article which focuses on impact on CEO pay and the recommendation that ‘energy companies should consider telling investors how executive compensation is linked to climate change risks. Remuneration policies should consider how tighter pollution laws, extreme weather events and efforts to reign in fossil fuels could impact creditors and shareholders, according to the Task Force on Climate-Related Financial Disclosures, the group set up by Bank of England Governor Mark Carney in his role as head of the Financial Stability Board. “How companies are remunerating their boards has been a very understated feature of the debate until now,” said Mark Lewis, a managing director at Barclays Plc and member of the task force, in a phone interview.” (Carney Panel Urges CEO Compensation Link With Climate Risk, Jessica Shankleman, Bloomberg)

Climate disclosure should be part of routine financial statements: The Wall Street Journal says that ‘Companies should publish an assessment of the losses they could suffer through climate change as part of their routine financial statements’ and quotes Mr. Bloomberg writing “What gets measured better gets managed better.” ‘The panel’s recommendations, which include broad suggestions applicable to all companies’ financial statements and specific proposals aimed at banks, insurers and the financial sector, will be presented to leaders of the Group of 20 leading economies in July.’ (Companies Should Report Possible Climate Costs, Say Global Executives, Jason Douglas, Wall Street Journal)

On Forbes, Dina Medland says that ‘The Task Force acknowledges that climate-related financial disclosure is bound to be evolutionary. But “the success of these recommendations depends on near-term, widespread adoption by organizations in the financial and non-financial sectors” it says. (Climate Related Financial Disclosures for Business: An Imperative for 2017, Dina Medland, Forbes)

IPE: Multiple role for Asset owners as users, reporters and to drive adoption, according to Investments & Pensions Europe.”Large asset owners and asset managers sit at the top of the investment chain and, therefore, have an important role to play in influencing the organisations in which they invest to provide better climate-related financial disclosures,” the task report reads. Asset owners should help drive adoption of the recommendations despite some having concerns about being seen as the potential “policing body” for making sure asset managers and “underlying organisations” take up the recommendations, according to the task force.’ According to IPE ‘widespread, near-term adoption of the recommendations is critical, said the task force.’ (FSB climate disclosures task force ascribes key role to asset owners, Susanna Rust, IPE). ‘Asset owners should embrace their role as the “policing body” of climate-related financial disclosures, says the high-level panel’ according to Responsible Investor. “The Task Force appreciates that expectations must be reasonable and that asset owners have many competing priorities, but encourages them to help drive adoption of the recommendations.” (FSB task force says asset owners should drive adoption of climate-related financial disclosures, Daniel Brooksbank, Responsible Investor ($)).

Investors in the vanguard: In initial analysis of the report Daniel Brooksbank says: “It may well be that December 14 2016 will mark the day that environmental, social and governance (ESG) truly got integrated: It might not be D-Day but it is certainly ‘TCFD-Day’. The Financial Stability Board’s Task Force on Climate-Related Financial Disclosure (TCFD) has today firmly put investors in the vanguard of climate change disclosure. It clearly states that asset managers and asset owners “including public- and private-sector pension plans, insurance companies, endowments, and foundations”, should implement its recommendations. Never again will asset owners or fund managers be able to claim it’s not their problem.” (Analysis: FSB climate task force recommendations — the day ESG really got integrated?, Daniel Brooksbank, Responsible Investor ($)).

Aviva: Rules need “real bite” by being made compulsory, according an Aviva chief Mark Wilson interview in the Evening Standard: ‘What gets measured, gets managed and what gets disclosed and published gets managed even better. We should give the disclosure real bite by making these recommendations mandatory, not voluntary. Only then will climate risk become integral to corporate governance.” (City leaders: Make climate change disclosure obligatory, Russell Lynch, Evening Standard).

Reuters also cover call for the rules to be made mandatory, and highlight that ‘According to Barclays, the fossil fuel industry could lose $34 trillion in revenues by 2040 as a global deal to limit temperature rise to well below 2 degrees Celsius reduces demand for oil, coal and gas, turning reserves into stranded assets.’ (G20 task force wants companies to come clean on climate risk, Nina Chestney, Reuters)

CPPIB: Improved company disclosure will help investors improve decisions and disclosure: according to an opinion article by Stephanie Leaist from Canada Pension Plan Investment Board in the Global and Mail. She writes: ‘There are many unknowns surrounding climate change, and that can cause discomfort. As investors, our job is to draw from current information sources to look into the future. Not knowing all the answers shouldn’t stop us from making plans based on the information at hand. The more detailed and relevant the information, the better investors can look forward, assess risks and opportunities and allocate capital accordingly.’ (Climate disclosure framework creates a better environment for investors, Stephanie Leaist, Global and Mail). They also has a news story on the recommendations (Companies must make clear risks posed by climate change: Carney panel, Globe and Mail)

Eni: climate change deserves further efforts in industry commitment and disclosure: Climate Home highlight that large oil and gas companies ‘will be among those required to explain how their long term plans could be impacted if governments adopt tougher low carbon policies, or when global warming starts to impact supply chains.’ … ‘The report comes with the support of companies valued at US$1.5 trillion and with assets of $20trn in management — among them Aviva, Blackrock, Barclays, Deloitte, Dow, HSBC and TATA. “The increasing attention on climate change deserves further efforts in either industry commitment and disclosure,” said Claudio Descalzi, CEO of Italian oil giant Eni, another company to participate in the study. (G20 panel tells energy giants to come clean on climate risks, Ed King, Climate Home)

AODP: guidelines may prove to be as influential as the Paris Agreement climate deal: according to Business Green. Julian Poulter, chief executive of the Asset Owners Disclosure Project, said the guidelines mark an “important milestone” and may prove to be as influential as the Paris Agreement climate deal. “These guidelines send a clear message to companies and investors that climate change can threaten their business model and the market needs to know what they are doing about it,” he said. “The FSB was set up by the G20 to help tackle threats to the global financial system in the wake of the sub-prime mortgage crisis. It is now taking essential action to head off the emerging threat to world financial stability from a ‘sub-clime’ crisis and it must not stop here.” (Carney-backed task force set to deliver far-reaching corporate guidance to tackle ‘climate trifecta’ of risks and Carney leads calls for private sector climate disclosure, Jocelyn Timperley, Business Green ($)

Use existing scenarios, including a 2 degree scenario, or develop own: ‘Companies should use a range of existing, publicly-available climate-related scenario analysis or develop their own in order to assess the risks posed to their business by climate change, according to the Financial Stability Board (FSB) Task Force on Climate-Related Financial Disclosures (TCFD)’ write Environmental Finance. ‘“[The report] reiterates the importance of companies adopting science based targets in order for these disclosures to identify and mitigate meaningful financial risks,” said Douglas Farquhar, principal consultant at verification company DNV GL. Various publicly available scenarios were summarised by the report including, in terms of what they assumed about carbon emissions, solar deployment, energy efficiency, energy mix, carbon price and weather impacts.’ The report quotes Helen Wildsmith, who leads climate stewardship work at CCLA, ‘“We may need to have an entity in that role, such as the IEA or the IPCC,” she said, likening such a model to the way that central banks set stress tests for the banking sector. But she added that it was important that companies also devise their own scenarios, “to help them drive their own planning and thinking”.’ (Organisations should use existing climate scenario analysis or develop their own, says TCFD, Joe Walsh, Environmental Finance ($))

The recommendations have also been covered in City A.M. (It’s not easy being green: Mark Carney welcomes new recommendations for environmental disclosures from firms), Platts (Global task force sets recommendations on climate risk disclosure), Fund Strategy (Mark Carney and Michael Bloomberg launch G20 climate risk report), and Edie (Mark Carney and Michael Bloomberg set out recommendations for climate disclosure adoption).

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