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Improving climate-related financial disclosures

Leading companies recognize the risks and opportunities presented by climate change and by measures to address it. A growing number of businesses are taking steps to report those risks and opportunities to shareholders, investors, customers and other stakeholders through sustainability reports, voluntary measures, and financial filings. However, a challenge remains: the various ways companies are reporting make it difficult to compare disclosures of different companies.

To improve consistency, the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, established the Task Force on Climate-Related Financial Disclosures (TCFD) in 2015. The task force released recommendations, also known as its framework, to guide voluntary disclosures in 2017. The framework recommends that companies disclose climate-related risks and opportunities across four areas: governance, risk management, strategy, and metrics and targets. An increasing number of companies have supported and started aligning their disclosures with the Task Force recommendations over the last few years.

C2ES hosted a pair of workshops in 2019 focused on two topics: translating information gathered through climate scenario analysis into information that be used for corporate decision-making and assessing and disclosing the risks of physical climate impacts. From these workshops we identified best practices, challenges and lessons learned, publishing them in a new policy brief, Implementing TCFD: Strategies for Enhancing Disclosure. The brief describes ways companies can improve their reporting by addressing challenges with corporate scenario analysis and improving techniques to identify material risk. The brief also lists several key insights and continued challenges for companies to consider when assessing and communicating their unique climate-related risks and opportunities.

Key Insights

  • Successful TCFD implementation requires coordination across multiple corporate teams. Since the TCFD framework focuses on financial outcomes, it has helped expand climate change discussions beyond corporate sustainability professionals to also include legal, finance, risk management, and systems planning units.
  • Companies can build support from senior leadership by broadening the analysis to reveal business opportunities, rather than focusing solely on risks. Executive-level support is crucial to a robust climate change strategy.
  • Managing for climate change means translating risks and opportunities into the right business language. Once climate-related risks and opportunities are translated into business financial terms, management teams can better justify new investments or strategies compatible with various climate futures.
  • To help scope TCFD-related scenarios analyses, companies should conduct broad screenings for physical and transition risk. Cursory reviews of publicly available data can be used to as a starting point and can guide more in-depth TCFD analysis down the road.
  • Accurate and organized data is the cornerstone of any good TCFD analysis. Data might include geographic locations of assets and details about investment portfolios, but for many companies this data takes time to compile, refine, and verify.
  • Stress testing modeling outcomes allows companies to better anticipate potential rough points in a transition. Modeling disruptive transitions using scenario analysis is challenging because most scenarios assume gradual transitions. However, financial impacts are most likely to occur during times of disruption, such as if game-changing technologies emerge or major climate policy is enacted.
  • The TCFD recommendations do not suggest that companies produce stand-alone TCFD reports. However, these reports may showcase corporate dedication to addressing climate change and help strengthen internal engagement.

Continued Challenges

  • TCFD guidance does not address the overlap and differing needs between the analyses required to identify and manage transition and physical risk, despite the necessity for companies to consider both. Additionally, TCFD guidance surrounding physical risk is less robust than for transition risk. Moving forward, new tools and continued information sharing are needed.
  • More work is needed to quantify and communicate the financial benefit of climate resilience investments. Resilience can have soft, long-term benefits such as preventing damages from climate events which are difficult to define, measure, and report. Standardization of resilience indicators, for example using the percentage of real estate holdings in flood zones for banks, across economic sectors is needed to help investors, shareholders, and regulators better evaluate the resilience of companies.
  • Companies need more clarity regarding what constitutes “material” climate risk. Given the long timeframes associated with climate change, stakeholders still have conflicting ideas regarding the definition of materiality. The task force, regulators and others need to clarify the issue of materiality for companies as it relates to climate change.
  • Companies are struggling to balance shareholder demands for more quantitative details in disclosures with the range of outcomes and uncertainty that scenario analyses yield. Thus far, rather than report specific numbers, many companies are opting to report on strategies that are robust under a range of possible scenarios. Going forward, companies and shareholders must develop a shared understanding and tolerance for the uncertainty surrounding any risk quantification.
  • The flexibility of the TCFD recommendations, particularly on scenarios, have resulted in corporate climate disclosures that vary significantly. Since one of the key goals of the TCFD framework is to enable more comparable and consistent disclosures, greater guidance and standardization is needed on a sector-by-sector basis on how such exercises are conducted and reported upon.
  • Policymakers should also recognize the significant economic risk that small- to medium-size businesses face. Smaller businesses are often not focused on climate-related risk issues given capacity constraints, and privately held companies do not face the same shareholder pressures that are driving action among publicly traded companies. More technical assistance will be required to engage smaller businesses on this issue.

Governments are also taking a closer look at climate risk disclosure. In March 2020, the United Kingdom Financial Conduct Authority proposed a new rule that would require commercial companies with a UK premium listing to state whether they comply with TCFD-aligned disclosures or to explain their non-compliance. In the United States, disclosure is also garnering more attention. In the 116th Congress, Sen. Elizabeth Warren (D-Mass.) and Rep. Sean Casten (D-Ill.) introduced the Climate Risk Disclosure Act of 2019 in their respective chambers. In Getting to Zero: A U.S. Climate Agenda, C2ES recommended that Congress direct the Securities and Exchange Commission to require public companies to disclose material climate-related financial risks under a range of climate scenarios and their strategies for managing those risks. C2ES will monitor these developments and continue supporting companies to capitalize on new insights and overcome challenges with their climate disclosures.

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