Climate-Related Financial Disclosures – 3 Things you Need to Know

In 2015 G20 countries asked the Financial Stability Board (FSB) to review how the financial sector can better take account of climate-related issues. The FSB established the Task Force on Climate-related Financial Disclosures (TCFD) to develop consistent and coherent guidance for companies to disclose their climate-related risks. Last month the TCFD released its final “recommendations for consistent and voluntary climate related financial disclosures”.

The aim of these recommendations is to promote more informed investment, credit, and insurance underwriting decisions to better identify the financial system’s exposure to climate-related risks and opportunities. The recommendations propose companies assess climate risk through ‘scenario analysis’, modelling how the business would perform under a 2ᵒC temperature increase scenario.

This week 11 banks announced plans to become the first in the industry to put the guidelines into practice.

1. TCFD focus points

The first thing you need to know is what the TCFD recommends. Here are the four core elements of climate-related financial disclosures:

Governance: Board-level oversight of climate-related risks and opportunities and a description of management’s role in the assessment and management of them.

Strategy: Descriptions of the risks and opportunities to the organisation over short, medium and long-term time periods, as well as the impacts upon the organisation’s businesses, strategy and financial planning. When doing this, it is important to cover the resilience of the company’s strategy to different climate scenarios, including a 2°C or lower scenario.

Risk Management: A description of the organisation’s processes for identifying, assessing and managing climate-related risks is recommended. These processes should be integrated into the organisation’s overall risk management strategy.

Metrics and Targets: The TCFD recommends the disclosure of metrics and targets used to assess and manage relevant climate-related risks and opportunities. Inclusion of Scope 1, 2 and if appropriate Scope 3 greenhouse gas (GHG) emissions and related risks are also recommended.

2. The benefits

Secondly, its useful to be aware of the benefits of reporting emissions and how using the recommendations can help your business. Adopting the recommendations will help:

  • access to capital by increasing investors’ confidence that the company’s climate-related risks are appropriately assessed and managed
  • facilitate more effective disclosure of material information in financial filings
  • increased awareness and understanding of climate-related risks and opportunities within the company resulting in better risk management and more informed strategic planning
  • proactively addresses investors’ demand for climate-related information in an investor-friendly framework.

3. How do we work with the recommendations?

With an estimated US$1 trillion needed to make the transition, a low-carbon economy financial industries must play a significant role in driving sustainable growth. The TCFD recommendations help facilitate this by providing a clear roadmap of information companies should provide for investors.

Whilst there is no timeframe for implementation of the recommendations, the TCFD encourage companies to adopt them as soon as is possible. The recommendations are currently voluntary but could be incorporated into climate legislation in G20 countries in the future, notably in Germany and the United Kingdom who are strong supporters of the initiative.

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