​Here’s a follow-up to our December 2016 blog on the Financial Stability Board’s (FSB’s) recommendations to facilitate wide-spread climate-related disclosures by organizations with public debt or equity to promote more informed investing, lending, and insurance underwriting decisions.
 
In late June 2017, the FSB Task Force of the G20 nations released its final recommendations (the “report”) to encourage companies and financial-sector organizations (e.g., banks, asset owners and managers, insurance companies, lenders) in G20 countries to assess and incorporate climate risks and opportunities in their mainstream public financial reporting. At the time the report was released, more than 100 CEO’s expressed support for the recommendations (full list of pre-release signatories). To supplement the final recommendations, the FSB also provided accompanying documents including:

• Implementing the Recommendations of the Task Force on Climate-Related Financial Disclosures (the “annex”).
• The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities (the
  “technical supplement”).

 
In finalizing its recommendations, the Task Force received more than 300 responses through its public consultation process. The FSB noted that, overall the commenters were supportive of the recommendations (summary of the public consultative process and comments). The Task Force used the specific and constructive feedback on the draft to refine the recommendations in its final report.
 
Final Recommendations | Key Changes and Enhancements from the Draft
The Task Force made only slight changes from the draft recommendations. The final report keeps the focus on the four thematic areas targeted in the draft recommendations: governance, strategy, risk management, and metrics and targets.

O ne of the more notable refinements relates to the FSB’s recommended disclosures that organizations should make in their annual, public financial filings. The FSB provided clarifications in response to concerns about having potentially immaterial issues reported in public financial filings. The FSB also repeated its caution that organizations should not prematurely conclude that climate-related risks and opportunities are not material.
 
As highlighted in the FSB’s Summary of Key Changes and Clarifications document (see highlighted table below), the FSB now recommends:

• Disclosures on climate-related Governance and Risk Management should be made even if a company views climate as a non-material issue. 
  • The FSB distinguished these types of disclosures because many investors want insight into the governance and risk management context in which organizations’ financial and operating results are achieved, regardless of perceived materiality.
  • Acknowledging current differences in sophistication, the Task Force provides flexibility for some companies to begin by incorporating these disclosures in other publicly available reports.  
• Disclosures on climate-related Strategy and Metrics and Targets, on the other hand, should be made only if such information is material.
  
  • The FSB further recommends that certain types of companies disclose their climate-related Strategy, Metrics, and Targets (even if they deem climate is immaterial) through other public reporting. [1]

 
Two other key changes between the draft and final recommendations report, included:

• Expanding the guidance on disclosures about remuneration to cover all organizations that have identified climate-related risks as material (the draft had this applicable only to organizations in the energy sector).
  • This falls under recommended disclosure (a) for Metrics and Targets and states: Where climate-related issues are material, organizations should consider describing whether and how related performance metrics are incorporated into remuneration policies.
• Simplification of the disclosure related to the scenarios analysis (recommended Strategy disclosure (c)) and clarification to focus on resiliency of an organization’s strategy to climate risks and opportunities.

The FSB also added emphasis and/or further explanation about several items addressed in the draft report:

• Clear linkage of climate-related risks and opportunities and associated financial impacts are widely applicable to all organizations, regardless of sector or location.
• Increasing demand and need for more public disclosure of climate-related financial implications by companies with public equity or debt and for more consistency (and further encouraging both publicly capitalized companies and asset owners/managers to quickly implement the recommendations).
• Refined the recommended disclosures and streamlined the supplemental materials for disclosures from two key groups: the financial sector and the four non-financial sectors (e.g., energy, transportation, materials and buildings, and agriculture, food, and forest products) with the highest proportion of greenhouse gas (GHG) emissions, energy usage, and water usage.
• Benefits of the disclosures being made in annual financial filings (and subject to internal governance processes substantially similar to those used for financial reporting).

• Acknowledgement of existing national reporting requirements (e.g., the U.S. SEC requires disclosure of material issues affecting the company’s financial condition) and clarification that any of recommendations that are incompatible with national requirements should be disclosed in other official company reports.
• Consideration existing voluntary and mandatory climate-related reporting frameworks (e.g., CDP, GRI, IIRC) and encouraged those frameworks to further align with the recommendations.
• Understanding that reporting of climate-related information will continue to evolve.

 
The FSB highlighted four key benefits to the publicly-traded companies that implement these recommendations:

 The Task Force also re-emphasized the potential financial impacts of climate-related risks.  The final report and the supplemental materials (e.g., Implementation Annex, Technical Supplement) provide additional explanation and examples of the potential climate-related financial impacts potentially facing many companies in the short, medium, or long term. For example, see Figure 1 (below) and Tables 1 and 2 from the final report. 

​What to Expect Next
Now that the FSB recommendations are final, we can expect continued action on these issues from a number of perspectives, including:

• Increasing adoption of mandatory and voluntary disclosure requirements from trading exchanges and asset owners/managers (plus regulators of publicly traded companies).

• More shareholder proxy action on climate and associated risks.
• Growing action and coalition efforts from the largest companies and investors to incentivize and strengthen commitments to science-based reduction targets and renewable energy (e.g., the RE100)
• Evolution and streamlining of analyst research tools and reporting schemes (e.g., CDP, CDSB, IIRC, SASB, DJSI, MSCI), including more media and public access to climate-related disclosures.

 
Our Suggested Action Items to Publicly Capitalized Companies
The FSB’s recommendations provide a great reflection point for publicly capitalized companies to consider their climate-related risks and opportunities.
 
For the many companies that have already begun this journey, it provides confirmation of the business case for doing so and additional guidance to improve the quality, efficiency, and consistency of the analysis and disclosures.
 
It provides impetus for increased collaboration amongst a company’s board of directors and leaders from across the organization including: the Chief Financial Officer and other financial leaders, the Chief Investment Officer and other investor relations leaders, risk management leaders, and climate/sustainability leaders.
 
For publicly capitalized companies that haven’t yet begun to assess which, if any, climate risks or opportunities may impact them, now is a good time to start. If you are a board member or senior leader at one of these companies, we recommend the following five initial steps:

1. Review and share the final FSB recommendations with the company’s senior leadership, including board members. Chief Financial Officers, in particular, should be in the loop to assess and implement the recommendations.
2. Consider whether and how positioned your company is to make the recommended, voluntary disclosures.
3. Research whether your trading exchange (and/or its regulatory body) is exploring specific climate-related disclosures in addition to those already required.
4. Assess your key analysts’ and major shareholder’s climate-risk management and disclosure expectations.
5. Initiate development of: (i) a GHG emissions and energy use inventory (and water, if relevant) and (ii) a plan to explore how your company might be impacted by climatic changes and shifts to a lower carbon economy.
   • Both activities will require access to the requisite subject matter experts who can develop GHG/energy/water inventories, build climate-knowledge capacity among your senior leadership, and facilitate adequate board oversight.
   • While the FSB final recommendations clarify that GHG emissions and energy usage metrics do not need to be publicly disclosed in the annual financial filings if deemed immaterial, companies will need the data to assess the materiality, governance, and risk management practices in light of potential climate-related financial impacts.

 
If your next annual financial filing occurs before you’ve taken these steps and you choose to omit any of the recommended disclosures, you should consider providing a rationale for omitting the disclosures. This could include a statement that the company acknowledges the FSB’s recommendations, is assessing how it will implement them, and will reflect any such implementation in the next annual filing.

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A​pplicability
You’ll want to read this if:

• You are on the board of directors or work at a company that has (or is seeking) public equity or debt.
• You work in the financial sector (e.g., at an asset owner or management firm, bank or other lending institution, insurance company, endowment, foundation).
• You invest in publicly capitalized companies or privately managed assets are interested in the potential financial risks posed to them and the financial system by climate impacts.

 
These issues are most relevant to a publicly capitalized company’s board of directors and its financial and risk executives and sustainability leaders (if any). Also, all employees might want to be aware of how climate risks and opportunities might impact their company.
 
Summary
A Financial Stability Board (FSB) task force of the G20 nations released recommendations that encourage companies and financial-sector organizations (e.g., banks, asset owners and managers, insurance companies, lenders) in G20 countries to assess and incorporate climate risks and opportunities in their mainstream public financial reporting.
 
These recommendations send a strong market signal that climate-related risks are financial risks. The  guidance is designed to “elicit decision-useful, forward-looking information” on climate-related financial impacts to help “investors, lenders and insurance underwriters to appropriately assess and price climate-related risks and opportunities.”
 
The Recommendations | Companies are Encouraged to Address 4 Areas
The recommendations focus on four thematic areas that the FSB feels reflect how many organizations operate. These include: governance, strategy, risk management, and metrics and targets.

The FSB recommends specific disclosures that organizations should include in financial filings. See the report’s Figure 3 below. For example, the task force recommends companies conduct and publish a 2 degree scenario business plan, Scope 1 and 2 greenhouse gas (GHG) emissions, and any ‘appropriate’ Scope 3 emissions. The FSB provided supplemental guidance for sectors it judges are most affected by climate change.

The FSB states that the recommendations are applicable to organizations across sectors and jurisdictions. It also recognizes the key role that large asset owners and asset managers play “in influencing the organizations in which they invest to provide better climate-related financial disclosures.”

Climate Risks and Opportunities with Financial Implications
The report provides context about the range of financial implications posed by climate change. It summarizes why some organizations haven’t yet factored climate change into their business strategy.
 
“The large-scale and long-term nature of the problem makes it uniquely challenging, especially in the context of economic decision making. Accordingly, many organizations incorrectly perceive the implications of climate change to be long term and, therefore, not necessarily relevant to decisions made today.”
 
It noted that climate-related risks and an anticipated transition to a lower-carbon economy will impact some industries (e.g., organizations dependent on extracting, producing, and using coal, oil, and natural gas) more significantly than others. It also remarked that these fossil fuel-centric organizations are not alone: “in fact, climate-related risks and the expected transition to a lower-carbon economy affect most economic sectors and industries.”
 
In a similar vein, the FSB cautioned organizations not to prematurely assume that climate impacts—risks or opportunities—are not material to them. The Task Force believes “climate-related risks are material risks for many organizations, and this framework should be useful to organizations in complying more effectively with existing disclosure obligations.”
 
It further found that while the risks presented are significant, so are the opportunities for organizations “focused on climate change mitigation and adaptation solutions.”
 
As illustrated in the report’s Figure 1, “climate-related risks and opportunities can affect organizations’ revenues and expenditures, and possibly estimates of future cash flows, as well as their assets and liabilities in a number of ways.”

​Context
Although the recommendations are voluntary, each G20 nation will determine—after the FSB finalizes them in 2017—whether and how to incorporate them into legislation, regulations, or guidance. Many investors are calling for countries and exchanges to adopt them as mandatory as some countries have already done.
 
Regulators or exchanges in many countries, including the US, already require companies to report on material risks—including climate-related risks—in their financial disclosures. Increasingly, more countries require specific disclosures such as quantitative metrics on energy usage and/or GHG emissions and at least qualitative reporting on climate impacts.
 
France’s Energy Transition Law (Act 17), for example, requires France-domiciled listed companies and asset owners/managers to report climate factors and carbon emissions footprints by June 2017). The United Kingdom’s Companies Act 2006, Regulations 2013, requires listed companies to publish in  its Directors’ Report annual GHG emissions data.
 
For more details and other examples, check out the Principles for Responsible Investment’s Global Guide to Responsible Investment Regulation.
 
The FSB’s directs its recommendations to asset owners/managers and publicly capitalized companies. It also encourages other companies to explore and disclose the financial implications of climate risks and opportunities because it believes “climate-related risks and opportunities are relevant for organizations across all sectors.”
 
The FSB further acknowledged that climate-related financial reporting is at an early stage. The guidance it offers should advance the quality and consistency of mainstream financial disclosures related to the potential climate change effects on organizations.
  
What Next? Our Suggested Actions for Publicly Capitalized Companies
The FSB’s recommendations provide a great reflection point for publicly capitalized companies to consider their climate-related risks and opportunities.
 
For the many companies that have already begun this journey, it provides confirmation of the business case for doing so and additional guidance to improve the quality and consistency of the analysis and disclosures.
 
It provides impetus for increased collaboration amongst a company’s board of directors and leaders from across the organization including: the Chief Financial Officer and other financial leaders, the Chief Investment Officer and other investor relations leaders, risk management leaders, and climate/sustainability leaders.
 
For publicly capitalized companies that haven’t yet begun to assess which, if any, climate risks or opportunities may impact them, now is a good time to start. If you are a board member or senior leader at one of these companies, consider the following actions:

1. Review and share the draft recommendations with the board and senior leadership.
2. Consider how positioned your company is to make the recommended, voluntary disclosures.
3. Begin to explore how climatic changes and shifts to a lower carbon economy might present risks and opportunities that might impact your company

 
Whether your company has been addressing these issues or is just becoming aware of them, consider providing feedback on the FSB’s recommendations via the online consultation here. The public consultation process is open through mid February.  

Background About the FSB and the Task Force 
In response to the global economic crisis, the G20 nations established the Financial Stability Board (FSB) in 2009. The FSB serves as an international body that monitors and makes recommendations about the global financial system to promote international financial stability.
 
In December 2015, the G20 nations asked the FSB to establish an industry-led task force to review how the financial sector can take account of climate-related issues. The FSB created and asked the Task Force on Climate-related Financial Disclosures (TCFD) to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders. The FSB choose the TCFD’s 32 members to include both users and preparers of disclosures from across the G20 nations covering a broad range of economic sectors and financial markets. The members which include Unilever, Axa, PwC, Standard and Poor's, Blackrock and Barclays, represent $1.5 trillion in market capital, with $20 trillion in assets under management. See here for task force member statements supporting the report.

With increasing regulator, investor, and customer interest, board members must pay more attention to their company’s sustainability practices, impacts, and disclosures. The days when boards can view these as “soft issues” that they can ignore are quickly passing. Focusing on quantitative sustainability metrics and linking to innovation initiatives are ways that board members can help drive long-term corporate performance and value.
 
If you have 10 minutes or so, watch this @BoardResources interview with Evan Harvey (@EvanHarvey99, Nasdaq’s Director of Corporate Responsibility) for a great overview about why and how boards of directors should be more involved in their company’s environmental, social, and governance (ESG) programs. 
 
I concur with Mr. Harvey’s three recommendations to boards about how they can begin to monitor sustainability more responsibly:​

1. Create a board committee dedicated to overseeing sustainability issues (or at least embed a sustainability or ESG sub-committee into an existing committee such as the finance or oversight committee).

• I’d supplement this recommendation by noting that boards should be diversifying their membership by adding members with sustainability expertise.

1. Seek at least annual reporting about trending performance and challenges from the company’s main point of contact(s) for ESG programs.
2. Conduct independent research about the company’s ESG programs, impacts, and disclosures, especially comparing performance with sector peers and competitors and forecasting long-term issues.