The challenge presented by the FSB Task Force’s proposed climate disclosure framework
Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change
Last week when the G20 Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) published its report for 60-day consultation, Nick Robins - Co-Director of the UNEP Inquiry into the design of a sustainable financial system - asked somewhat rhetorically over Twitter ‘was this the day that climate disclosure came in from the cold & finally became core to finance?’
Certainly, this game-changer kicked off by the outstanding leadership of FSB Chair and Bank of England Governor Mark Carney, is the first time a group representing players from all parts of the investment chain – big business, bankers, accountants, investors – have developed a framework to render more transparent the profound risks posed by climate change and bring their governance firmly into the boardroom.
But against the current political backdrop in the US and Europe, what must happen over the coming months for the TCFD ‘s recommendations to truly becomes a milestone for integration of climate information into mainstream financial reporting sufficient to ensure the hard economics of climate risk forever trump the politics of climate denial?
Emission reductions required under the Paris Agreement alongside changing technology and demand dynamics imply a potentially disruptive move away from fossil fuels that will transform all major sectors. Robust disclosure has a critical role to play in enabling financial markets to price risks correctly, reward corporate strategy aligned with political objectives and technological progress, improve the efficiency of the low carbon transition by ensuring capital is put to most efficient use and sanction corporate strategy that ignores climate risk. Without it we will continue to see ill-informed management decisions that drive up the cost of the transition for policy-makers, investors and – ultimately – for consumers and communities, forcing governments to address the consequences of market failure.
IIGCC actively supported the work of TCFD, responding to the first public consultation about the scope of its work, presenting to TCFD plenary and submitting a full response (in tandem with INCR in North America and IGCC in Australia/NZ) on investor priorities for companies to to report their greenhouse gas emissions, disclose climate related risks, integrate these into their core business strategies, and make routine consideration of opportunities arising from a rapid transition to a low carbon economy a routine part of board-level decision making.
Investors called for TCFD to include the development and disclosure of 2-degree stress testing; absolute emissions reduction targets; information on resilience of a company’s strategy with regard to CAPEX planning; R&D; the full integration of a climate risk management approach to board level strategy; and use of both quantitative methodologies and narrative reporting to support comparisons over time that demonstrate progress year-on- year. We also emphasised the importance of better corporate climate risk reporting for any future disclosure of portfolio climate risk by investors themselves, and how best to support the development of methodologies emerging to support this
As stated in our supporting statement to the TCFD report, IIGCC believes material climate disclosures must become a routine part of annual corporate reporting practice. If fully implemented in all key markets the TCFD framework will drive more robust decisions that accurately reflect physical risks posed by climate change and transition risks arising from swift adoption of clean and efficient technologies. This will help secure business resilience over the time horizons relevant to the needs of long term institutional investors and their beneficiaries. It will also support the evolution of tools and methods for financial institutions to improve their own reporting practices and curb their portfolio-level exposure to climate-related risks (where disclosure standards should remain non-descriptive enough to encourage innovation and allow best practice to emerge).
What’s now crucial is the pace and scale at which institutional investors lean in to require companies to use the TCFD framework to bring consideration of climate risks and opportunities (under different scenarios including a 2°C pathway) into routine business decisions and competent board-level scrutiny / governance.
Investors will encourage adoption through their work as supporters of IIGCC’s corporate work programme and users of IIGCC’s Investor Expectations Guides for key high carbon sectors (oil & gas, mining, utilities and automotives) which offer a way to be consistent about how to require greater disclosure in line with TCFD standards. We hope many more investors will come forward to strengthen these co-ordinated engagement initiatives and to support the work of a new IIGCC sub-group on shareholder resolutions (formed recently to take forward work previously undertaken by Aiming 4 A).
IIGCC also wants to see governments adopt the TCFD recommendations as a key part of wider efforts to implement the Paris Agreement and facilitate a well-managed transition to a low carbon economy. In particular, IIGCC is asking the German 2017 Presidency – as part of its key agenda priority to focus on climate action - to persuade all G20 governments to drive early adoption at a national level. Likewise, IIGCC is asking the G20 to ensure the work begun by TCFD can be taken forward by the Green Finance Study Group as part of a collective commitment to implement TCFD recommendations in full and under the shortest possible timeframe, monitor their implementation and consider how to continuously improve climate disclosure in future.
Some investors are also calling for the International Organization of Securities Commissions to consider how it could enable greater standardisation in climate risk reporting practice and do more to secure consistency in the way regulators promote such disclosure.
So in answer to Nick Robins, if enough investors now use the TCFD recommendations, both to drive change within the companies they own and better manage their own portfolios, IIGCC believes publication of the TCFD’s first report can mark that moment in history when those who drive the economy and the market made plain to governments they can and will ensure markets transition to a well below 2°C world.
As previously published in Responsible Investor
— IIGCC (@IIGCCnews) December 14, 2016
— IIGCC (@IIGCCnews) December 14, 2016