What’s Your Climate Risk | What Publicly Capitalized Companies Need to Know & Do

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 TCFD's December 2016 Recommendations Report (Executive Summary Figure 2)

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 TCFD's December 2016 Recommendations Report (Figure 3)

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.”

The FSB TCFD's December 2016 Recommendations Report (Executive Summary Figure 1)

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.”

The FSB TCFD's December 2016 Recommendations Report (Figure 1)

​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.