Climate-Related Financial Disclosures

Many companies recognizing the risks and opportunities associated with climate change report on them in their corporate sustainability reports, through voluntary reporting frameworks, and in financial filings. To promote greater rigor and consistency in climate-related disclosure, an industry-led task force has developed recommendations on the types of risks should report and how. Companies across different sectors are now evaluating the recommendations and how to undertake the types of climate-related analyses they call for.

Climate risks fall into two general categories. Transition risks involve changes in law, policy, technology and markets related to the transition to a lower-carbon energy supply. Physical risks from climate change include damage to fixed assets, like buildings and property, or supply chain disruptions. They can result from extreme weather events or changes in water availability.

Climate change can also present opportunities, including expanded markets for existing products and services, new markets for new products, and cost reductions.

However, there is no single framework or set of guidelines for companies to report these risks and opportunities to investors and the public. In fact, nearly 400 mandatory and voluntary frameworks for climate and sustainability disclosure exist. Those with some of the highest corporate participation include the CDP (formerly called the Carbon Disclosure Project), the Global Reporting Initiative, and the PRI (formerly called the United Nations Principles for Responsible Investment).

In addition to the voluntary reporting frameworks, publicly traded companies must also provide periodic filings to the U.S. Securities and Exchange Commission, such as Form 10-Ks for domestic issuers and Form 20-F for foreign issuers. In 2010, the SEC provided some guidance on how to interpret the application of climate change disclosure requirements in financial reporting, but it has been limited. Some investors and stakeholders have called for increased disclosure of material information in financial filings and others are focused on the opportunity to improve the quality and consistency of voluntary reporting.

At the same time, some leaders in the financial sector have called for greater focus on the connection between climate change and the sector’s own systemic vulnerabilities. Mark Carney, governor of the Bank of England and chairman of the Financial Stability Board, outlined concerns about a chronic short-term perspective in an influential speech.

With these concerns in mind, the Financial Stability Board convened an industry-led Task Force on Climate-related Financial Disclosures. In June 2017, the task force issued recommendations focused on corporate governance, strategy, risk management, and climate-related metrics and targets. The recommendations include implementing guidance for companies on how to translate climate risks and opportunities into traditional financial terms, like revenues, expenditures, assets, and liabilities, and how to integrate climate risks into existing business continuity and risk management systems. A key recommendation is that more companies conduct a scenario analysis examining what climate change will mean for their facilities, operations, supply and distribution chains, as well as demand for their products and services over a range of plausible scenarios.

These recommendations are an important step toward improving the quality and consistency of corporate reporting. They are supported by more than 100 companies, including these members of the C2ES Business Environmental Leadership Council: Bank of America, BHP, Dow Chemical Company, and Royal Dutch Shell.