A lack of consensus on what constitutes a material climate risk is hampering companies' ability to disclose climate-related financial risk adequately, according to a global taskforce.
The taskforce on climate-related financial disclosures (TCFD) was mandated by the G20 group of nations to draw up recommendations to make climate-related financial risk disclosure by companies more comprehensive and consistent so they could be used by lenders, insurers and investors.
The task force has analysed existing reporting regimes, and in its first report, it outlines where there are gaps that are hindering effective use of the information corporations provide.
It found that most G20 countries require some form of climate-related disclosure, but only a limited number of measures pertain directly to climate-related financial risks. In general, disclosure of climate-related risk is required in mainstream financial filings if it is determined to be ‘material’, it noted.
However, there is a lack of consensus on what constitutes a material climate risk, often due to significant uncertainty surrounding the severity, timing, and impact of different climate-related risks on a company or asset class. These issues are open to interpretation and debate, and they drive much of the disagreement around what companies should disclose, the task force said.
The task force highlighted data from the Sustainability Accounting Standards Board (SASB) relating to the 2014 financial filings by top US-listed companies, which it said demonstrates the types of challenges faced by users of climate-related disclosures globally.
Some 27% of these companies identified no climate risk at all. Of the approximately 70% that did, only 15% used metrics, and approximately 40% used ‘boilerplate’ language - broad, non-specific wording that does not describe the reporter’s operating context. Risks related to the transition to a low-carbon economy were rarely disclosed.
The task force noted a report by US-based organisation the High Meadows Institute which found that as many as 50% of asset managers do not analyse climate risks and opportunities at all, due in part to lack of access to adequate disclosure information.
Rob Schuwerk, senior counsel at Carbon Tracker, said: ‘The direction of travel towards a lower-carbon economy is clear; stress-testing extractives companies’ businesses portfolios against the internationally agreed two-degree climate target is essential to quantifying their exposure.’
Jon Williams, financial services and climate change partner at PwC, said: ‘Up until now, financial services reporting on climate-related risks has been somewhat disjointed and limited, with firms often only disclosing numerical data on direct emissions from operations rather than climate risks in loan and investment portfolios and how these might appear under different scenarios.
‘While this is perhaps not surprising given that very few reporting regimes currently require this level of detail, it’s clear from the taskforce report that this needs to change if we are to both demonstrate and deliver long term financial stability,’ he said.
Other barriers to effective reporting flagged up by the task force include:
- Fragmentation: different frameworks and mandatory reporting requirements can be seen as complex, costly, confusing, and burdensome for those preparing financial reports.
- Disjointed placement: climate change-related information is currently reported through multiple routes, including via central government bodies; through sustainability reports; in annual financial reports; on company websites; or provided directly to NGOs or investors in response to surveys.
- Technical/methodological complexities: the further growth and development of climate science is likely to mean that the technical metrics and methodologies used for disclosures will evolve. Companies struggle to provide a balanced view of the range of possible outcomes.
- Emissions: direct GHG emissions are the most commonly required disclosure, yet they represent a small proportion of organisations’ overall carbon footprints. Other indirect GHG emissions and supply-chain risks are often significant but frequently overlooked by disclosure frameworks. The identification and calculation of such emissions remains complex, in part due to poor and inconsistent data from suppliers.
- Lack of verification/assurance: although many schemes request some form of assurance of information, the quality of assurance is rarely stipulated and standards for conducting assurance activities are limited.
The task force is due to provide its final recommendations to the G20 in December 2016.
