The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) released a comprehensive set of recommendations on December 14. The recommendations provide detailed guidance for companies on how and what to integrate in their financial disclosures related to climate change. The TCFD’s definition of climate risk encompasses both transition and physical risk (see chart below) and recommends companies address climate risk across governance, strategy and risk management, with a set of metrics and targets to show ambition and progress.
The recommendations also encourage companies to consider opportunities to be found in climate-related efforts such as cost savings through improved resource efficiency or supply chain resilience. The Task Force recommends the use of scenario analysis to disclose an organization’s planning under future scenarios, most notably one with in a 2°C scenario.
Growing Regulatory Momentum in Europe
With these recommendations, companies will be guided to producing long term outlooks on their value and risk management strategies for financial markets. The recommendations for disclosures of climate-related information are voluntary, but offer transparency that is increasingly being demanded by investors and resonate with recent regulatory efforts in France and the UK to require such disclosures. Indeed, responsible investing received a big boost in Europe, as the European Parliament voted to confirm a law that will require pension fund managers in the EU to account for climate-related risks in their investment strategies. The law introduces new requirements for risk management and reporting.
The law echoes Art. 173 in France‘s Law on the Energy and Ecology Transition (Loi TEE), which requires asset owners and asset managers to disclose financial climate risks ranging from carbon and energy risks to physical impacts of climate change.
A Market Imperative
Climate risk disclosures are more important than ever. In the context of the Trump Presidency and the latest round of cabinet appointments, it may be tempting to dismiss the risk associated with the “Energy Transition” – the rapid transition to a low-carbon economy. It may be tempting to ignore the need to disclose risks from the physical impacts of climate change in a context that promises fewer regulations and a dismissal of climate policy.
Yet, there’s no escaping the science and the reality of climate change, and the Trump administration’s stance on climate change gives even more urgency to both transition and physical risks of climate change.
Climate change and its impacts are not going away, and will likely worsen at an increasing rate if we continue to ignore them. Looking out a few years, these same physical impacts from climate change will eventually force us to transition rapidly away from fossil fuels to stop further degradation of the climate, leading to a ripple effect across the economy as entire value chains relying on fossil fuels, including major energy and transportation systems, will need to adapt – potentially at a high cost. The only question is how fast, and how expensive.
Markets have a chance to avoid being blindsided by a predictable risk. The TCFD offers a market solution, by the market, for the market. Mark Carney and Mike Bloomberg point out in an Op-Ed in The Guardian that “early disclosure rules allowed 20th-century financial markets to grow our economies by pricing risks more accurately.”
Disclosures are a small step that can help set in motions much larger changes through market forces, by pricing risk accurately, rewarding companies that take appropriate steps to prepare and adapt, and unlocking finance for resilience. Climate risk disclosures are an opportunity and a necessity for markets to both accelerate the energy transition and prepare for growing climate impacts.
Tools for Identifying Risk
Though the TCFD recommendations do offer guidance to disclosing climate risk, the process of scanning assets for exposure raises a number of challenges — from accessing raw climate data to selecting appropriate indicators and time frame, and interpreting the output while accounting for climate data’s unique complexity and sources of uncertainties.
To support corporations and investors looking to identify hotspots and quantify value at risk in their portfolio of assets, facilities or across their supply chain, Four Twenty Seven has developed a suite of enterprise applications that provide rapid, cost-effective screening across portfolios of 10,000+ assets.
Learn more about CREST, our Climate Resilience Support Tool for corporate climate risk management, and our climate data analytics services for financial institutions.
Four Twenty Seven in partnership Crowell & Moring LLP hosted a webinar on January 12th to present key recommendations from TCFD and discuss feasibility, next steps, and issues to consider for implementation. View the webinar recording.