The impacts felt by our changing climate – from erratic weather events, to forced migration, flooding and drought – will produce many winners and losers during the coming decades. It is a long-term trend of which an ever-growing number of investors are aware and starting to future-proof their portfolios in a way that mitigates climate-related risks while taking full advantage of the opportunities that are thrown up as a result, including the booming clean energy market.
It is for this reason that the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) has been so warmly welcomed. The G20, quite rightly, pointed out the 2°C-warming target set out in the Paris Agreement, as well as global finances in general, could potentially be compromised because climate change is not priced into financial markets. Investors have long held an interest in climate-related data. But the way in which they make decisions has been somewhat constrained by current disclosure from investee companies. It is not more disclosure that is required, rather better and more useful information, says the investment community.
In response, the FSB, the Mark Carney-chaired body charged with promoting global financial stability, came up with the TCFD, which is itself headed up by former New York Mayor Michael Bloomberg. The aim: to help companies come up with clearer, better and more consistent disclosures on climate risks and opportunities – with “material climate-related information” becoming part of corporate financial filings.
Ultimately, the Task Force is to help companies understand what financial markets want from disclosure – information that can help investors measure and respond to climate change risks.
Sounds good, right? It is. More than 200 companies, banks, governments and institutions have publicly backed the approach – a number that will only grow.
But the evolution of the TCFD and the recommendations it has established does have implications for the way in which companies will be asked to report in the future, albeit voluntarily.
For example, the updated CDP questionnaires for 2018 now include elements that align with the TCFD recommendations, to encourage more complete and comparable disclosures, and to give investors, lenders and insurers a better view as to just how exposed a company might be to impacts resulting from climate change. These come in the form of newly revised, sector-specific questionnaires.
The changes will require reporters to think slightly differently about their impacts, including using scenario analyses to better understand how their current business strategy positions the company in the context of a world that is transitioning to a 2°C warmer world.
Some interesting new questions now appear too, including a focus on how and where risks and opportunities are factored into financial planning, and whether climate change impacts inform business strategy development.
As was always the plan with TCFD, the popular recommendations that have been established could well shake-up the way business talks about climate change risks, impacts and opportunities at a strategic level. CDP is a strong advocate for the mandating of such universal company disclosure “to obtain consistent, comparable and high-quality information to reach companies who resist voluntary norms”.
As more and more companies agree to adopt the principles set out by the TCFD, and grapple with the changing reporting requirements, we can expect to see a few more changes coming down the line shortly too.