Today sees the publication of a milestone set of recommendations from the highly influential Task Force on Climate-Related Financial Disclosures (TCFD). Chaired by Michael Bloomberg, the philanthropist and former Mayor of New York, and created by Mark Carney, the Governor of the Bank of England and Chair of the Financial Stability Board (FSB), it sets out guidelines for how companies and investors should disclose climate-related risks and opportunities in mainstream financial filings.
The TCFD is an industry-led task force established out of concerns from G20 finance ministers and central bank governors that the financial implications of climate change are not adequately disclosed by companies and investors.
This is particularly true for the so-called transition risks: financial risks associated with the transition to a low-carbon economy. Changes in policy, technology, market norms and consumer preferences, for instance, could prompt a reassessment of the value of a large range of assets. These could affect most economic sectors and industries, from fossil fuels to food and consumer goods.
A 2015 study by the Economist Intelligence Unit estimated the value at risk, as a result of climate change, to the total global stock of manageable assets as ranging from US$4.2 trillion to US$43 trillion between now and the end of the century. It highlights that “much of the impact on future assets will come through weaker growth and lower asset returns across the board.”
Meanwhile, investment consultancy firm Mercer have just published their own analysis of the readiness of Europe’s 1,200 pension schemes and found that only 5% have considered the potential financial impacts of climate change on their portfolios.
Mark Carney has long been a champion of this agenda. The Bank of England itself stressed the importance of climate risk to financial stability in its quarterly report published two weeks ago.
This is why the work of the TCFD is so relevant. It is the first concerted, industry-led attempt to develop voluntary, consistent climate-related financial disclosures that will be useful to investors, lenders, and insurance underwriters in understanding material risks. The recommendations issued today ask for climate-related risks and opportunities to be disclosed in mainstream financial filings, putting the issue of materiality firmly on the agenda.
What now for companies and investors?
The focus now must be on implementation and gaining practical experience with the elements proposed. They must become part of routine financial statements across a wide range of sectors in the next reporting cycles. The real success depends on near-team, widespread adoption by companies and investors, with asset owners playing an important role in influencing the organisations in which they invest to provide better, forward looking, climate-related financial disclosures.
Governments and financial regulators must now also do their part in assessing these voluntary recommendations in relation to existing national legislation and regulation on disclosures. Stock exchanges’ regulators are well-placed strategically to integrate the recommendations within their own listing environment. The upcoming report of the EU’s High Level Expert Group on Sustainable Finance and recommendations related to disclosure and transparency should also embrace key elements presented in the TCFD recommendations.
A key emphasis needs to be put on transition risk scenario and forward looking analysis. It is one of the biggest elements in the TCFD text and one of the critical areas for progress. It is the most meaningful way to assess the extent to which business strategies and investment portfolios are consistent with, and resilient to, the transition to a low carbon economy required to keep global warming well below 2°C.
In the months to come, we should expect a number of industry groups, international bodies and multi-stakeholder platforms to dedicate time and resources to the development of new methodologies and tools for effective scenario analysis, including the establishment of a standardised, industry-wide below 2°C scenario. More information on key scenario elements and assumptions companies and investors need to report against is also to be expected.
The recommendations are also a powerful tool for strategic shareholder engagement. Because investors need to assess and report on climate risks themselves, they must understand how portfolio companies report and factor climate-related financial risks into their broader strategy. I expect a growing number of shareholder resolutions asking for better disclosure in line with the TCFD recommendations. I also expect asset owners to engage further with mandated asset managers on climate-related risks and opportunities.
A milestone on our journey to a low-carbon future
The TCFD’s recommendations have the potential to be a catalyst for the world’s transition to a low-carbon future and I urge investors and companies to endorse and adopt these recommendations in the next financial cycle.
The more the market recognises how much climate change threatens the long-term stability of the global financial system, the greater will be its ability to respond and correct our course away from catastrophic climate change and reap the benefits of the low-carbon transition.
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