Update | Why Public Companies Need to Undertake Climate Risk Planning

​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.

Footnote:
[1] The FSB recommends that certain companies (i.e., in the four non-financial groups with $1+ billion in annual revenue) should consider publicly disclosing the Strategy and Metrics and Targets information even if the information is not deemed material and not included in financial filings. Suitable public disclosure mechanisms would be “other official company reports” (i.e., defined as those issued at least annually, widely distributed, available to investors and others, and subject to internal governance processes substantially similar to those used for financial reporting).

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