Climate change is a systemic business risk, says global taskforce

15th December 2016


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Author

Kim Trueman

Companies should report climate risks and opportunities in their annual financial report to make information useful to investors, a global taskforce of finance experts has concluded.

The Taskforce on Climate-related Financial Disclosures (TCFD) was asked by the G20 group of the world’s major economies to develop recommendations to improve the clarity and consistency of corporate climate reporting to make the information more useful to lenders, insurers and investors.

The former mayor of New York City, Michael Bloomberg, chairs the taskforce and other members include representatives from banks, insurance companies, asset management firms, pension funds, large non-financial companies and consultancies.

The taskforce put forward four recommendations it says would improve corporate transparency and which are applicable to organisations across sectors and jurisdictions. These cover governance, strategy, risk management, and metrics and targets. It has also produced guidance on producing climate disclosures consistent with its recommendations.

UK quoted firms already report climate risks and opportunities under the Companies Act 2006, although sometimes the detail is included in a separate sustainability report or on the company website. The taskforce argues that including the information in the main financial report will ensure that it is shared at least once a year.

The UK government recently confirmed that information on a firm’s environment and social impacts and risks should be included in the main financial report and accounts rather than separately in its response to a consultation on transposing the EU Non-Financial Reporting Directive.

The taskforce also says organisations should assess potential climate risks and opportunities under different scenarios, including a future where global energy systems are transformed to such an extent that the global average temperature increase is limited to 2°C above the pre-industrial average.

In a letter to Mark Carney, chair of the Financial Stability Board (FSB), Bloomberg wrote: ‘Until now, it has been difficult for investors to know which companies are most vulnerable to climate change, which are best prepared, and which are taking action.

‘As the FSB has highlighted, without effective disclosure of these risks, the financial impacts of climate change may not be correctly priced – and as the costs eventually become clearer, the potential for rapid adjustments could have destabilising effects on markets.’

Richard Samans, chair of the Climate Disclosure Standards Board (CDSB), said that the recommendation that a well-governed company must regularly test its business strategy against climate change-related risks and report on its strategy in its mainstream report set a new governance norm.

‘This added rigour and accountability to shareholders will compel the attention of chief financial officers, chief executives and boards of directors as never before. That is ultimately what has been needed to price in climate risk in corporate capital expenditures and investor asset allocations,’ he said.

Robert Schuwerk, senior counsel at financial analysts Carbon Tracker, said: ‘Carbon Tracker’s work has pointed to significant “group-think” among fossil fuel companies, who typically foresee a future at odds with our globally-agreed climate targets and the development of low-carbon technologies.

‘Using tools such as forward-looking scenarios and sensitivity analysis, the taskforce’s recommendations critically connect climate-related risks and financial reporting.’

Paul Simpson, chief executive of the CDP, said that the G20 governments should consider whether disclosure recommended by the taskforce should eventually become mandatory.

The TCFD is consulting on its recommendations until 12 February. It will present final recommendations to G20 leaders at a summit in Hamburg in July.

To see the full recommendations report, technical guidance and consultation, click here.

The CDSB has produced a factsheet summarising the recommendations here.

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