TCFD Releases Final Recommendations

Conceptual map of climate-related risks, opportunities, and financial impacts, from the final TCFD recommendations report

The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) released their final recommendations in late June. The changes to the recommendations reflect the extensive feedback the Taskforce received from the stakeholder engagement process in the past six months. Some key changes include:

  • Simplifying the recommended disclosure related to Strategy and scenarios to focus on the resiliency of an organization’s strategy to climate risk and opportunities
  • Establishing a threshold for organizations that should consider conducting more robust scenario analysis to assess the resilience of their strategies.
  • Clarifying that the recommended disclosures related to the strategy and metrics and targets recommendations depend on an assessment of materiality, whereas disclosures on governance and risk management are relevant for all organizations.
  • Updated conceptual map of climate-related risks and opportunities and associated financial impacts.

TCFD Recommendations at G20

The recommendations were presented at the G20 summit in Hamburg, Germany, with hopes that the world leaders would formally endorse the guidelines. Climate change was high on the agenda for the summit, where all but the United States voiced a strong recommitment to the goals of the Paris Agreement, and the G20 included by reference, the TCFD recommendations in their Climate and Energy Action Plan for Growth.

CEOs Endorse the Recommendations

The TCFD final recommendations were endorsed by over 100 CEO’s from a wide range of companies, including large financial institutions like Barclays and Morgan Stanley as well as energy and manufacturing companies like Suez, DuPont, and Unilever. Reactions from a broad range of financial analysts were also positive, noting the need for improvements and wider adoption of climate risk disclosure practices.

A number of initiatives are already under way to think through and plan the implementation of the TCFD recommendations, such as the UNEP FI’s effort with major banks from around the world who have pledged to work towards adopting these recommendations, and put forth actions they see as needed for broader adoption of climate risk reporting.

Further Readings

  • The Economist Intelligence Unit’s  “The Road to Action” report finds that investors, asset managers, and banks are in urgent need of a way to identify and measure how the industry is responding to climate-related risks. It notes that their interviewees widely regard the TCFD’s recommendations as having the clearest mandate to providing possible solutions.
  • Aon’s white paper Financial Regulators Awaken: Prepare to Disclose Climate Risk notes that risk management and analytics is what differentiates the TCFD’s recommendations from many existing standards. “Risk management, including insurance and risk analytics, is given a key role in helping businesses understand and quantify climate risks. The recommendations provide a framework that can enhance risk management, empower corporate strategy, and improve resilience in a fast-changing world.”
  • The 2-Degree Investing Initiative takes a deep dive into corporate disclosures in its forthcoming report “Limited Visibility”, part of their Tragedy of the Horizon program. The report presents the current state of corporate disclosure on long-term risks and long-term forward looking data using analysis of MSCI World companies’ financial disclosures.

Four Twenty Seven helps investors, Fortune 500 companies, and government institutions understand how to quantify and monetize climate change impacts on operations and asset portfolios. Our clients rely on Four Twenty Seven’s tools and models to factor into financial and operational planning processes. Learn more about how we are helping our clients assess and adapt to climate risks.

Trump and Paris: What Impact on Climate?

President Trump’s decision to withdraw the United States from the Paris Agreement triggered a strong response from the international community, and many foreign leaders quickly denounced the decision and vowed to maintain or increase their nations’ efforts. China and the European Union have announced a new alliance to lead on climate issues. In addition, U.S. states are forming alliances with other nations, with California Governor Jerry Brown traveling to meet with Chinese President Xi Jinping and sign climate partnerships with local Chinese leaders. Governor Brown also participated in an event for the Under 2 Coalition, a group of subnational actors in 33 countries committed to reducing carbon emissions, which he led California to establish in 2015. Yet the loss of U.S. federal leadership is still daunting. Other world players are looking to fill this leadership gap, including new French President Emmanuel Macron who has invited American climate scientists to continue their work in France.

Impacts on U.S. Emissions

U.S. leaders in the private sector and in state and local government are pressing forward. As David Victor notes for the Brookings Institution, the loss of U.S. federal leadership makes the path to achieving the Paris Agreement’s goals harder to achieve, but not impossible. Rhodium Group’s modeling showing the annual emissions projections,  shows that the systematic dismantlement of climate policy by the Trump Administration makes it impossible for the US to attain its 26-28% emissions reduction target. However, uncertainty from a range of other factors, including energy markets dynamics (oil and gas prices in particular) and the health of the economy could drive large variations in emission trajectory, compounding the policy uncertainty around the fate of climate policy and programs targeted by Republicans.

Rhodium Group projections of U.S. greenhouse gas emissions

Even before the Paris Agreement announcement, the administration had worked to impede the nation’s effectiveness on climate issues. Among many other programs in the line of fire, the ability to monitor carbon emissions, with budget cuts proposed to severely limit the Environmental Protection Agency’s Greenhouse Gas Inventory, and eliminate the National Aeronautics and Space Administration (NASA)’s Global Carbon Monitoring program. The loss of these tools would critically undermine the U.S.’ ability to implement and enforce emissions regulations.

Impacts on Adaptation and Resilience Funding, Domestically and Internationally

As part of the withdrawal, Trump announced that the U.S. would end its payments to the Green Climate Fund, falsely claiming that “nobody even knows” where the funding for developing nations is ending up. Yet the fund, which aims to support equally climate mitigation and adaptation projects, fully details 43 projects currently funded from the $10+ billion pledged. By ending its payments, the U.S. cuts $2 billion in expected funding, a serious blow to the fund. It is yet to be seen if other nations will increase their pledges to fill this gap. Trump’s proposed budget will cut grants and funds for the National Oceanic and Atmospheric Administration (NOAA), Department of Housing and Urban Development (HUD), and close to 50% of the EPA’s scientific research programs budget. The proposal belies previous administration claims that their EPA plans would return environmental responsibilities to states, as the budget reduces “state grants for air and water programs by 30 percent.” Other budget cuts may target innovation and fundamental research with cuts for ARPA-E and the Department of Energy.

New U.S. Coalitions Form to Support Paris Agreement 

Though funding to climate programs are at risk, leaders of U.S. cities and states are forming alliances to voice their commitment to achieving the nations’ contributions even without federal government support. The U.S. Climate Alliance, which was formed by the state governors of Washington, New York, and California, is comprised of 13 states and territories make up the alliance representing 35.9% of the country’s population.

The We Are Still In movement, which is led by Michael Bloomberg, seeks to allow subnational entities formally to submit reports on progress to the United Nations Framework Convention on Climate Change, raising questions of whether and how the Framework should allow subnational actors to participate. More than 1200 mayors, governors, college and university leaders, businesses, and investors have pledged to continue to support climate action to meet the Paris Agreement through the We Are Still In; Four Twenty Seven is proud to join these efforts as a signatory.

The effect of these new coalitions is yet to be seen, but the signal they send to other nations and advocates around the world is critical to cushion the blow from the withdrawal of the world’s second largest emitter from the Paris Agreement. The rest of the world has sent a clear signal that they remained committed to fighting climate change, with European leaders, Indian Prime Minister Modi, and Chinese Premier Xi in particular reiterating their commitment in the days that followed the announcement by Donald Trump.

What Now?

The Trump administration has brought new levels of uncertainty to climate policy in the U.S., but efforts to tear down regulatory programs are more likely to create continued confusion and delays than to deal a final blow to efforts to reduce emissions. The greatest uncertainty, however, comes from the broader policy and political context, the ability of the administration to carry out its agenda, and the impact of its proposed policy on the economy.

Meanwhile, many cities and corporations are galvanized. Their efforts to compensate the policy shifts at the federal level will not be enough to make up for the lost budget and policy ambition, but it will ensure the U.S. does not trail too far off its international commitment and keeps an informal but critical presence on the global stage.

Supply Chain Risk, on SustainabilityDefined

Supply Chain Risk on SustainabilityDefinedSustainabilityDefined is the podcast that seeks to define sustainability, one concept (and bad joke) at a time. Hosted by Jay Siegel and Scott Breen. Each episode focuses on a single topic that helps push sustainability forward. They explain each topic with the help of an experienced pro.

CEO Emilie Mazzacurati joins the show for Episode 14 to discuss supply chain risk, leading with the dire news that the world may run out of coffee and chocolate by 2050! How is that possible, you ask? Emilie helps Jay, Scott, and their listeners understand why supply chains are so critical to delivering the goods we love, and how understanding the effects of climate change could help us avert a world without coffee and chocolate. Click the audio player above to listen in!

Audio Blog: Engaging the Private Sector on Climate Resilience

Four Twenty Seven CEO Emilie Mazzacurati discusses how the private sector is responding to climate change risks and highlights opportunities for local governments to engage with local businesses on climate resilience in this audio recording from a panel on The Economic Impacts of Climate Change at the 2016 California Adaptation Forum.

Follow along with Emilie’s talk in the slides below.

Tipping the Balance: US and China Ratify Paris Agreement

Late Friday night, China and the U.S. announced that they formally joined the Paris Agreement. This momentous announcement tips the balance towards a quick entry into force of the Agreement, by the end of 2016 — if not by the end of September.

The Paris Agreement requires 55 percent of the 180 signatories to ratify or formally join, representing more than 55 percent of global emissions. The UNFCCC ratification status tracker, last updated as of Friday afternoon, counted 26 parties accounting for 39 percent of emissions.

26 Parties have ratified of 197 Parties to the Convention. Accounting for 39.06% of global GHG emissions.
Source: UNFCCC (accessed September 6, 2016)

China and the U.S. together are responsible for over 38 percent of global emissions, so their commitment pushed the emissions from signatories to 75 percent, well over the 55 percent threshold. Securing the missing 27 country signatures will be not a problem now that the U.S. and China have confirmed their commitment. The next wave of ratification is expected later this month, as countries gather in New York City for the annual General Assembly of the United Nations on Sept. 19.

Paris Agreement signed by President Barack Obama
Source: whitehouse.gov

The Paris Agreement announcement came late at night, on the eve of a long holiday weekend in the U.S., indicating that the Obama administration was eager to avoid media attention and not turn this decision into a presidential campaign talking point. The administration has consistently argued that the Paris Agreement was not a treaty since it did not impose any legally-binding constraint to the U.S. This interpretation ruffled feathers in Europe at the time the document was negotiated in late 2015, but enabled the administration to proceed with formally ‘joining’ the agreement with a signature from the President, without having to submit the document to ratification of the Senate.

Senate ratification (or lack thereof) had been the kiss of death for the Kyoto Protocol, and U.S. climate negotiators were intent to avoid involving the Republican-controlled Senate, which would undoubtedly oppose ratification. This accelerated procedure does, however, make the future of the Paris Agreement fully dependent upon the next U.S. President, since that same signature can be undone just as easily. Hillary Clinton has committed to pursuing current efforts from the White House to reduce GHG emissions and build resilience, while Donald Trump has made contradictory statements about climate science and announced he would pull out of the Paris Agreement if elected. Given current polls and forecasts for the November 2016 elections, we expect the U.S. will stand by its commitment to the Paris Agreement for the next four years.

Will It Be Enough?

The quick entry into force of the Paris Agreement is critical for many reasons. First, reducing emissions aggressively and early-on is the most effective way to prevent catastrophic impacts from climate change. Many scientists consider the commitments under the Paris Agreement to be insufficient to stop climate change. These commitments, known as “Intended Nationally Determined Contributions” (INDCs – or NDCs, without the “intended” for contributions announced after December 2015), are due to be updated every five years, which leaves the door open to more aggressive emission reductions in the future.

A joint study from the University of Maryland and the Pacific Northwest National Lab showed that the current emission reduction commitments, denoted “Paris – Continued Ambition” on the chart below had only a 50 percent chance to keep global warming under 2 degrees Celsius. Countries would have to increase their policy ambitions and reduce emissions much more drastically to have a shot at keeping global warming in the 1.5-2-degree range. The 2 degrees of global warming threshold is considered by a majority of climate scientists the upper limit for global warming to avoid severe and irreversible consequences.

Emissions pathways and temperature probabilities
Source: UMD and PNNL joint study, Dec 2015.

The other reason for which a quick entry into force of the Paris Agreement could be a game changer is the amount of adaptation finance it could help unlock. The Agreement sets a goal of mobilizing $100 billion a year between 2020-2025 in climate finance, both for mitigation and adaptation. This money is much needed to engage in ambitious adaptation projects in developing countries, where the impacts of climate change are expected to be most harmful.

Towards Marrakech

Climate policy remains high on the agenda for global leaders — from the Paris Agreement to the G20 statement this weekend, which ‘reaffirmed’ the G20 countries’ commitment to address climate change through emission reduction policies and climate finance. The announcement from the US and China paves the way for growing momentum ahead of the next Conference of the Parties (COP 22) in Marrakech, Morrocco, with a renewed focus on implementation and adaptation.

What Brexit Means for Climate

Reposted from The Huffington Post, The Blog, view it on HuffPo HERE.

Image courtesy: Free Range Stock, photographer Daniel J Schreiber “London Landscape"

BOTTOM LINE

  • In the short run, Brexit means, at the very least, delays and complications in the process towards the ratification of the Paris Accord.
  • The financial volatility caused by the referendum’s outcome could distract the worlds’ financial regulators and have a negative impact on current efforts to better regulate climate-related financial disclosures.
  • Looking ahead, the incoming Eurosceptic government in the UK is unlikely to make climate change its priority, depriving global climate negotiations from a leader and political engine towards more ambitious GHG cuts.
  • In a worst case scenario, a full-blown global economic crisis would set back investments in clean energy, cut budget for both mitigation and adaptation efforts, and fuel further discontent from the middle-class and the unemployed.
  • Over the long run, a possible “contagion” effect enabling populist victories in upcoming elections in the US, Spain, France or Germany over the next 12 months could further hamper the enactment of effective global climate policy.

ANALYSIS

Political Implications: Impact on the Paris Accord

The only certainty regarding the impact of Brexit on climate policy comes from the extensive political uncertainty and financial volatility the referendum outcome has triggered. As the political debate turns towards the process for the UK to exit from the EU and deepening internal tensions between the UK and the “pro remain” constituents within Scotland and Northern Ireland, this uncertainty will at a minimum cause a temporary slowdown of the ratification process of the Paris Accord.

The ratification process was already expected to be long and complex for the EU. Each country has to approve the ratification domestically before the EU as a whole ratifies the accord. In the context of such a lengthy process, we think it is highly unlikely the lame-duck Cameron government would stick its neck out and push for a rapid ratification of the accord in the next three months, before its scheduled October departure. It is unclear how the UK will affect the EU ratification process during the two years preceding Britain’s formal exit from the EU.

This leaves the next government in charge of a possible ratification. Leading candidate for British Prime Minister, Boris Johnson, and the UK Independence Party leader Nigel Farage, who are credited with driving the success of the Leave vote, both do not believe in or prioritize climate change, casting a shadow of uncertainty over whether the UK might actually ratify the Paris accord at all.

However, the Paris Accord requires the ratification from 55 countries representing 55 percent of global emissions to come into forces. A refusal from the UK to ratify would send a negative signal but a single country representing 2 percent of global emissions would not bring the global process to an end. While the UK has historically been a driving force in global and EU climate negotiations, we expect the new UK government will at best be a follower, at worst a laggard and opposing force in global climate policy.

Beyond Britain: The Rise of Populism

While the direct political implications of the referendum on UK climate policy are quite predictable, we cannot rule out a potential ripple effect on the willingness from other countries to ratify the Paris accord. More generally, the UK vote signals that current populist trends in the world’s largest economies – U.S., France, Germany in particular – could bring a deep reshuffling of cards for climate policy. Populists parties are typically lukewarm, if not outright opposed to climate policy and global agreements, as illustrated by the so-called Trump Trajectory in the U.S.

A rise in climate-sceptic governments could bring to a halt the progress brought about by the Paris accord and set us back toward a high carbon emission pathway. At this point in time, however, we believe most governments have a robust understanding of the seriousness of the issue of climate change, and will do their best to proceed with the accord ratification and with meeting their targets.

Financial Implications: Impact on Efforts to Regulate and Price Climate Risk

A very immediate impact from Brexit-induced financial volatility and risk of recession will be felt on efforts to better understand, regulate and price climate-related risks on financial markets. The very institutions and individuals that have been leading this effort globally – the Financial Stability Board and its Chair, Mark Carney, who is also the Chair of the Bank of England, as well as to some extent the Securities and Exchange Commission in the U.S., are going to be entirely focused on preventing a complete collapse of the British economy and a global recession. This will necessarily cause distraction away from the recent efforts to push climate change higher on the agenda of financial decision-makers.

Assuming the world’s financial leaders are successful in preventing a global recession and the volatility of financial markets continues, we expect the discussion to resume and allow the recommendations from the Task Force on Financial Climate-Related Disclosure to garner the attention needed from global financial regulatory bodies.

However, if Britain’s decision to leave the EU were to cause continued turmoil on financial markets around the world, leading to a major recession, the impacts on climate change policy could be extensive, and mostly negative. Recessions in general are bad for the environment because jobs and financial volatility typically take precedence on the political agenda over environmental regulations and climate policy, often perceived as putting added burden on the economy. A global recession could lead to budget cuts and increased contention over energy and climate budgets, and otherwise lead to a scale back of efforts to reduce emissions.

Financial instability also means a setback for investments in clean energy, with financial flows likely to flock towards safe havens (U.S. bonds, gold) and away from riskier investments.  Expectations of trade financing faltering, credit spreads narrowing, emerging markets assets under serious stress and a worse-than-expected earnings season, impacting equity valuations all point to less money for adaptation in developing countries and a further slowdown in renewables investment levels.

Conclusion

The UK’s decision to leave the EU puts both financial markets and climate policy to the test. Financial markets were still slowly recovering from the second greatest recession in the history of modern markets, and this is where the main uncertainty stands at the time of writing. Short term volatility may bring distractions but unlikely to drive a meaningful change of course away from greater climate risk disclosures. If continued economic turmoil materialized, it could slow down investments in clean energy and put climate and environmental issues on the back burner once again.

By Emilie Mazzacurati and Camille LeBlanc

Image courtesy: Free Range Stock, photographer Daniel J Schreiber “London Landscape”

 

Insights in Resilience: International Adaptation

We asked our Director of Advisory Services Yoon Kim, about her work on international adaptation and for insights from her recent trip to the 2016 Adaptation Futures Conference in Rotterdam Netherlands.

1. Tell us about your work supporting the US Agency for International Development’s (USAID’s) national adaptation planning efforts and your recent publication on this topic.

In the international arena, we’re currently seeing a shift from a focus on immediate adaptation needs to a more strategic, longer-term approach to adaptation planning. Working closely with USAID’s Adaptation Team, I facilitated the mainstreaming of adaptation into planning and decision-making in developing countries through the implementation of high-level, cross-sectoral stakeholder workshops. These workshops sought to catalyze the development of national adaptation plans (NAPs) as described under the United Nations Framework Convention on Climate Change by demonstrating USAID’s approach to climate-resilient development, building broad buy-in and support for the NAP process, and identifying opportunities for cross-sectoral coordination and collaboration. To capture and share lessons learned from USAID’s experience implementing NAP stakeholder processes in Jamaica, Tanzania, and 11 coastal countries in West Africa, I led the development of a paper on USAID’s experience facilitating NAP processes, which was published in Climate and Development earlier this year.

2. What are some of the lessons learned from early NAP processes in developing countries?

Climate change does not respect sectoral or geographic boundaries. So, it is critical to engage key sectors as well as ministries, departments and agencies, including more powerful entities, such as the finance ministry, from the outset. Early and continuous engagement helps to promote ownership and buy-in for the adaptation process and facilitates coordination. The support of a powerful entity such as the Prime Minister’s or Vice President’s Office can also help to build support and motivate action.

Mainstreaming also tends to be more effective when one starts with an existing planning process and considers how climate change may affect it. For instance, in Jamaica, linking adaptation efforts to the country’s long-term development plan, Vision 2030 Jamaica, helped to make adaptation relevant to sectoral stakeholders and to demonstrate how adaptation planning could complement existing planning efforts.

3. You were just at the 2015 Adaptation Futures conference in Rotterdam, Netherlands. What was your key takeaway?

I was heartened by the range of adaptation efforts taking place in key sectors such as health, urban resilience, and disaster risk reduction. However, I also saw a couple of key gaps regarding financing and the private sector. As more jurisdictions move from vulnerability assessments to adaptation planning, it becomes increasingly urgent for them to identify a set of appropriate funding sources and mechanisms and to understand how best to apply them. While there is important work being done by a number of donors, research institutes, and non-governmental organizations on these issues, there is still a need to map financing options, both in terms of sources and potential mechanisms (e.g., bonds, taxes), and to link them to demonstrate sectoral and location-specific applications. Doing this successfully will require dialogue across international, national, and subnational levels and consideration from the outset of how funding will be accessed and utilized.

Regarding the private sector, we often refer to them as an undifferentiated block. However, to engage them effectively, we need to unpack this term and develop a more nuanced understanding of who we mean by the “private sector” in a given context. Four Twenty Seven has found in its work with different private sector entities that the needs and concerns of financial institutions differ significantly from those of manufacturing companies which in turn differ from healthcare providers. This differentiated understanding is critical for being able to identify entry points for engagement that not only speak to what these entities care about but also opportunities to leverage competitive advantage to develop solutions.

Redefining Climate Risk

Comment Letter from Four Twenty Seven to Task Force on Climate-Related Financial Disclosures. (Download full letter here)

May 23, 2016

Dear Chairman Bloomberg,

Four Twenty Seven, Inc., a climate resilience research and advisory firm, is pleased to submit this letter of comment for your consideration and to help inform the work of the Task Force on Climate-Related Risk Disclosures (TCFD) during Phase II.

We commend you for the important work undertaken by the TCFD and your deliberate efforts to engage practitioners and stakeholders in providing input along the way. Providing guidance around climate risk disclosures is a critical step not only to help ensure financial markets will not be blindsided by predictable risks, but also to ensure that investors send the appropriate price signals to the decision-makers for the underlying assets – from corporate boards to public officials and real estate owners — thus providing an incentive to better prepare for and adapt to the physical impacts of climate change.

Our comments stem from years of working closely with Fortune 500 corporations to help them understand climate change impacts, quantify risk and monetize costs. We anticipate this type of analysis will need to become widespread for corporations to comply with the forthcoming guidance from the TCFD, and wanted to share our lessons learned from our past work.

Our comments, detailed below following the questionnaire structure, center around two key takeaways:

  1. The need to redefine climate risk to better account for direct and indirect risks related to the physical impacts of climate change. Regulatory, technology or transition risks are by no means confined to greenhouse gases, and focusing a disclosure framework only on extreme weather events and direct physical impacts would be deeply misguided. It is critical that corporations understand, address and disclosure their exposure to risks and opportunities related to transition risk due to:
  • Regulatory changes driven by climate change (e.g. changes in underground water regulation, permitting, zoning, etc.);
  • Costs and revenues associated with finding and deploying adaptive technologies to improve corporate resilience, mitigate risk exposure and promote more efficient resources use;
  • Costs associated with capital expenditure, retrofitting or moving facilities, infrastructure and other critical assets out of harm’s way.
  • Costs and revenues associated with increasing the company’s adaptive capacity, ranging from increased legal and insurance costs to investments in human capital, supply chain risk management, engagement with local governments to support climate adaptation efforts, and other public-private partnerships.
  • Macro-economic and financial risk for property owners, market risks for certain products, etc.

 

  1. The need to incorporate climate data into decision-making processes and provide vulnerability assessments at the asset-level for both corporations and investors.
  • Corporations need to utilize fully the wealth of climate data and projections that are available, and leverage sophisticated techniques and models to incorporate uncertainty into their decision processes.
  • Climate risk analysis must be performed at the asset-level, even if the final disclosures do not include all the asset-level data, and should rely on common standards, assumptions and scenarios to enable comparison across assets and across markets.
  • Risk assessments should be subject to third-party verification to ensure they are complete and cover all the material risks.

Download Four Twenty Seven’s Comment Letter (FourTwentySeven_PhaseI_CommentLetter) for our detailed analysis on climate risk reporting.

Policy Brief: The Evolving Regulatory Landscape of Financial Climate Risk Disclosure

This Four Twenty Seven Policy Brief provides a summary of key findings from the Task Force of Climate-Related Financial Disclosures Phase I Report and highlights issues of interest to reporters and users of financial disclosures within corporations from the financial and non-financial sector.

What is the Task Force on Climate-Related Financial Disclosures?

In December 2015, the Financial Stability Board created a Task Force on Climate-Related Financial Disclosures (TCFD). The industry-led Task Force, chaired by Michael Bloomberg, is mandated to make recommendations for improving voluntary financial disclosure of climate-related risks. This coordinated international effort comes after investor advocacy organizations, like Ceres, have called attention to the poor quality of climate risk disclosures in financial filings (10-K management disclosures) and the lack of enthusiasm from the Securities and Exchange Commission in enforcing its 2010 guidance on climate change disclosure.

The Task Force released its Phase I report on April 1st. The report provides a high-level review of the existing landscape of climate-related disclosures, establishes fundamental principles for effective disclosures, and defines the scope and objective of the Task Force’s work through 2016. The report comes on the heels of an SEC ruling that ExxonMobil must include a climate change resolution on its annual shareholder proxy at the request of shareholders including the NY State Pension Fund.

Why is this Important?

The ultimate goal of the TCFD is to enable financial market participants to incorporate considerations on climate risks and opportunities into investment, credit and insurance-underwriting decisions, as well as to increase investor engagement with boards and management with respect to corporate climate risk management. This portends momentous change for the most exposed sectors. Over time we believe that the impact of the report has the potential to mainstream climate risk analysis and disclosure reporting requirements across all financial asset classes – equity, commodities, real estate, bonds – and will force a focus on climate resilience for all underlying assets – corporations, energy, agriculture, real estate, cities, and more.

Improved financial disclosures on climate-related risk will enable more informed decision-making within the financial markets and yield positive impacts for the economy. A higher standard on financial disclosures will also enable “appropriate pricing and distribution of risks throughout markets” and reduce financial instability by lowering the risk of an abrupt change in asset values (“transition” risk).

Just as the ultimate goal of the FSB and the G20 is to avoid another major financial crisis, In our view, the Task Force embodies the best climate change financial policy architecture that will promote market efficiency in a context of scientific uncertainty and information asymmetry. While the Task Force recommendations will not be binding, they come at a time when market authorities and financial regulators are looking to gain a greater understanding of climate change impacts on financial markets, and the Task Force recommendations will constitute a critical reference point for consensus on climate risk disclosures, and facilitate international standardization of requirements.

The Current Landscape of Climate Risk Financial Disclosure

The Task Force report finds that current climate risk financial disclosures are fragmented and incomplete, with a lack of agreement on what constitutes materiality. Most disclosures consist of boilerplate language that does not provide decision support or even useful information to investors. They also fail to acknowledge an organization’s specific risk profile and exposure to climate risk. Finally, most disclosures pertain to climate information in general and not to climate-related financial information.

The TCFD report highlights in particular the lack of comparability across disclosures due to ad hoc reporting practices, which prevents analysis of possible systemic risk in financial institutions’ portfolios and in financial markets at large. These findings are consistent with previous reports from Ceres and from the Sustainability Accounting Standard Board (SASB), as noted in their Technical Bulletin on Climate Risk from January 2016.

Proposed Principles for Effective Disclosures

The Task Force lays out seven fundamental principles for effective disclosures:

  1. Present relevant information.
  2. Be specific and complete.
  3. Be clear, balanced, and understandable.
  4. Be consistent over time.
  5. Be comparable among companies within a sector, industry, or portfolio.
  6. Be reliable, verifiable, and objective.
  7. Be provided on a timely basis.

While these principles are fully aligned with general principles of financial disclosures and with previously established climate disclosure framework, notably from the Climate Disclosure Standard Board, they raise a number of practical challenges when applied to climate risk disclosure. Climate science continues to evolve, as does global climate policy, making it difficult to be “consistent” over time. Climate impacts touch businesses and the economy well beyond the walls of any given corporation, but accounting for these indirect risks in a “specific and complete” manner is extremely challenging. An accepted methodology to measure and quantify climate risk will go a long way towards ensuring that disclosures meet these principles, and that the information is “comparable among companies.”

Looking Ahead: Phase II Scope of Work

The Task Force will seek to establish guidance as to what needs to be reported, in what format, and for what purpose.

Climate-Related Risks and Opportunities

The first challenge the TCFD will take on is defining what qualifies as climate-related risks and opportunities. In the framework outlined in the Phase I report, the TCFD echoes the common dichotomy between “physical risks” (e.g. extreme weather events) and carbon-related “non-physical” risks (e.g. carbon regulations, cost of low-carbon technology, asset liability, etc.). In our view, this framework is bound to evolve to better account for the breadth of regulatory, technological, market/economy, and reputational impacts directly related to climate risks and opportunities, including for example: changes in zoning laws, cost of adaptive technologies, changes in commodity pricing, etc.

Governance

Second, the Task Force will ensure climate-related risks and opportunities are considered in the broader context of the reporting entity’s strategic management. The Task Force will encourage disclosures pertaining to the governance process, specifically how boards and executive leadership consider and approach climate risks and opportunities.

Entities: Preparers and Users

Third, the Task Force will develop recommendations for reporting by non-financial companies – mainly publicly-traded corporations – as well as by financial intermediaries, investors, and asset managers that may be exposed to climate change in their portfolio. While recommendations will likely focus on companies above a certain size, they may also apply to privately-held corporations. In the financial sector, the Task Force intends to emphasize risks associated with underlying loans and investments in companies, and possibly into real estate investments as well.

The Task Force is also interested in better understanding how the climate-related disclosures will be used and by whom. The objective is that disclosures be provided in a format such that users across the entire financial value chain can integrate climate risk metrics into existing risk assessment, portfolio analysis, asset allocation, and other financial decision-making processes.

Information to be disclosed

Finally, the Task Force will give particular attention to the information being disclosed. This information may include both quantitative and qualitative disclosures, providing “consistent and comparable data and metrics” to be aggregated across portfolio.Screen Shot 2016-04-04 at 12.01.32 PM

For quantitative metrics, an established accounting system exists for carbon accounting, but no such common methodology is available for physical and indirect impacts of climate change, especially not across a broad range of sectors and asset classes. The Task Force will need to balance the conflicting needs between finding a lowest common denominator metric that can be used across sectors, and disclosing data and metrics that provide relevant insights into sector-specific risks. The Task Force may encourage greater use of scenario and sensitivity analysis to support forward-looking assessments of risks and opportunities.

For qualitative disclosure, the Task Force will consider governance, transition strategies, priorities, and processes. This indicates that companies with a vision and plan for greater climate resilience, together with well-supported Key Performance Indicators showing progress towards established resilience milestones, will be better positioned to protect shareholder value.

Next Steps

The Task Force will be working on Phase II elements through the end of 2016 and will deliver its recommendations to the FSB in December 2016, with a finalized report expected in February 2017. The Task Force intends to integrate and leverage stakeholder input throughout the process and is currently inviting feedback through May 1st in the form of a detailed questionnaire on its website. The questionnaire solicits structured feedback on reporters’ and users’ needs, scope and definition of climate risks and best practices.

The regulatory landscape of climate risk disclosure is evolving rapidly. Corporations and investors will be well advised to stay current on legal and policy changes related to climate change risks, and to deepen their understanding of climate change science and its impacts on their business. While climate change presents a wide array of direct and indirect impacts, many of these impacts can be forecasted and managed. Businesses able to take in new knowledge on climate change will be able to stay ahead of the curve, manage regulator and investor expectations, protect their value, and capitalize on opportunities.

Learn more about how we are helping corporations adapt to their climate risk.

Reference Documents

TCFD Phase I Report

SEC Commission Guidance Regarding Disclosure Related to Climate Change

Ceres Cool Response Report

SASB Technical Bulleting 2016-01

From Science to Action: Using Climate Science for Adaptation

We have all heard about the doomsday climate change can bring. Rising seas, blistering heat waves, and epic storms are but small samples from the chronicle of destruction possible due to climate risk.  When considering the doomsday scenarios, questions arise about where, when, and how these changes will take place.

Recent research from a team of climate scientist led by James Hansen posits that the timeframe in which we will begin to see the impacts from sea level rise and super storms, may be more severe and shorter than expected. The paper argues that the phenomenon of stratification (when melting freshwater from glacier melt disrupts the saline pumps of the deep ocean, causing warm water to collect at the bottom of the sea where it melts ice shelves) along with other feedback loops, have not been fully captured in previous climate models.

The Hansen Theory

Hansen and his team suggest that with the new math in place “ice mass loss from the most vulnerable ice, sufficient to raise sea level several meters, is better approximated as exponential than by a more linear response. Doubling times of 10, 20 or 40 years yield multi-meter sea level rise in about 50, 100 or 200 years.” In other words, ice melt that was previously thought to be occurring at a predictable rate is now potentially occurring at rate several times higher.

This is not the first time that the science has been updated and caught the eye of the media. As a result, climate scientists like James Hansen and Michael Mann have become well known in environmentalist circles.  In 2012, climate activist Bill McKibben became especially revered when his article in Rolling Stone Magazine: Climate Change’s Terrifying New Math gathered similar attention and reactions from the media as the Hansen report.

As suggested by the new research and steady stream of media updates, it is clear that climate science is a constantly evolving and improving practice. While it is true that the data points are becoming more robust, and new discoveries like stratification are being baked into the latest climate models, scientists will be the first to tell us that we still have a lot left to learn about how climate change is altering our earth’s systems.

Climate Scientist James Hansen stands by a 1000 ton boulder that is theorized to have been lifted by a super storm 120,000 years ago onto the cliffs of North Eleuthera in the Bahamas. At the time of the ancient storm, ocean temperature was only 1 degree C warmer than today.
Climate Scientist James Hansen stands by a 1000 ton boulder that is theorized to have been lifted by a super storm 120,000 years ago onto the cliffs of North Eleuthera in the Bahamas. At the time of the ancient storm, ocean temperature was only 1 degree C warmer than today.

Michael E. Mann, the scientist who popularized the classic hockey stick graph stated in response to the new report “Some of the claims in this paper are indeed extraordinary. They conflict with the mainstream understanding of climate change to the point where the standard of proof is quite high.”

Towards Climate Adaptation Science?

While the work climate scientists like Hansen and Michael Mann continues to advance the science, some members of the climate community are beginning to question the value of continuing to refine the accuracy of climate science. Suggesting instead that it may be time to refocus resources traditionally spent on increasing the degree of confidence towards adaptation science.

The argument is that after a certain point the ability for climate science to generate new insights is subject to diminishing returns. As such, it doesn’t matter as much to nail down exact predictions of when and where and by how much the impacts of climate change will hit, when we know they are already here and will continue to grow. With the climate science we have now, we are very good at projecting what 60 cm of sea level rise looks like, and how that sea level rise will impact our coasts. However, we are not great at knowing when that sea level rise will happen.

Those wanting to focus resources on adaption science argue that this distinction shouldn’t really matter. Think of the results of climate science like a high blood pressure reading, how bad the reading is doesn’t change the fact that you still have to go exercise and change your diet if you want to be healthier; and its better to hit the gym sooner rather than later.

Using Science for Decision-Support

This is not to say that advancements from Hansen and other climate scientists are irrelevant. On the contrary, it is extremely valuable work, but their findings provide information that should be used to spark interventions that buffer vulnerable regions from the worst of climate change.

At Four Twenty Seven we are picking up where the scientific reports stop. By translating the key warnings and lessons of climate science into strategies that can reduce financial, infrastructural, and social risk, we can prepare for the impacts of climate change regardless of when they occur. By analyzing, monitoring, and providing site specific insights into how climate change affects normal operations, we manage the complexities for stakeholders whose responsibilities cover a wide range of populations and global facilities.

“LIDAR data is often collected by air, such as with this NOAA survey aircraft (top) over Bixby Bridge in Big Sur, CA. Here, LIDAR data reveals a top-down (bottom left) and profile view of Bixby Bridge. NOAA scientists use LIDAR-generated products to examine both natural and manmade environments. LIDAR data supports activities such as inundation and storm surge modeling, hydrodynamic modeling, shoreline mapping, emergency response, hydrographic surveying, and coastal vulnerability analysis.” (source)
“LIDAR data is often collected by air, such as with this NOAA survey aircraft (top) over Bixby Bridge in Big Sur, CA. Here, LIDAR data reveals a top-down (bottom left) and profile view of Bixby Bridge. NOAA scientists use LIDAR-generated products to examine both natural and manmade environments. LIDAR data supports activities such as inundation and storm surge modeling, hydrodynamic modeling, shoreline mapping, emergency response, hydrographic surveying, and coastal vulnerability analysis.” (source)

Having reliable climate data and a robust understanding of the changes climate change has put in motion is a great starting point for determining risk factors. LIDAR data from NOAA and other hydrological data sets can be used to anticipate coastal vulnerability to climate charged changes like sea level rise.  NASA has its own set of valuable climate data, which has been used to map everything from melting ice in Greenland to diminishing wine grape harvests in France and Switzerland. Such robust and continuously updated datasets allow for meaningful vulnerability assessments that can inform effective adaptation plans.

Our team has been putting climate data like this to use for our clients. As part of our commitment to the White House Climate Data Initiative we created a dashboard tool of Heat and Social Inequity in the United States, designed to help health care providers understand the risks climate change poses to their community and hospital operations.  It’s through tools like this that we hope to help our clients prepare for the risks climate change presents to the businesses and communities they serve.

It is our hope that the science continues to advance, and new research like that presented by Hansen and his team continues to give us a better picture of the rate at which we can expect climate change to escalate. We also hope to use this information to advance the important work of adaptation. Solving climate change takes both good science and a roadmap forward.  A ‘climate doomsday’ becomes less scary when we realize the power is in our hands to be prepared regardless of when it happens.

Learn more about our work to prepare for the impacts of climate change.