Climate Disclosure: A Transition from Thinking to Action
“There has been a transition in thinking. And this is now beginning to be translated into action.”
-Mark Carney’s speech, “A Transition in Thinking and Action,” delivered in early April at the International Climate Risk Conference for Supervisors in Amsterdam
The Task Force on Climate-related Financial Disclosures (TCFD) recommendations continue to gain support and momentum in the finance and business community. In some of the latest endorsements of the recommendations, Belgian capital markets and stock exchange authorities signed their statement of support for the TCFD on March 22, 2018. This brings the total official supporters of the recommendations to at least 290 organizations, including four governments and 23 financial regulators. Canadian banks Scotiabank and CIBC are two such organizations that publicly endorsed TCFD recommendations in recent weeks.
A number of organizations have already taken a first stab at making climate-related disclosures in accordance with the recommendations. Amongst early adopters contributing to the advancement of the climate disclosure practice and adding to the growing list of participants are The Second Swedish National Pension Fund (AP2) and Sembcorp Industries, a leading energy, water, marine and urban development group. In response to a shareholder resolution, Occidental Petroleum also released its inaugural “Climate-Related Risks and Opportunities: Positioning for a Lower-Carbon Economy”, referencing the TCFD recommendations. Some commentators suggest the disclosure fell short.
Further guidance, tools and practices are emerging to assist organizations in identifying and disclosing climate risks and opportunities relevant to their business. The TCFD released sector-specific guidance with deeper dives into the physical and transition factors impacting those sectors. It also introduced scenario analysis as a tool that can help organizations think about climate change in the context of their business over the near, medium and longer term. The TCFD now plans to continue its mandate into 2019 and has introduced two new initiatives: (1) reporting on implementation experience with a focus on best practices, and (2) a Resource Hub to provide technical support, data and collaborative partnerships.
Other market players are joining forces in the development of new practices in climate disclosure and risk assessment. For instance, nine leading investors, including pension funds, insurers and asset management firms, announced their collaboration with UNEP FI on advancing investors’ climate-related disclosure practices. The pilot – with strong Canadian representation from Addenda Capital, Caisse de Dépôt et Placement du Québec and Desjardins Group – “will focus on developing the analytical tools and indicators required to assess and disclose exposures to the risks and opportunities presented by climate change.” This is the second such pilot facilitated by UNEP FI to address the TCFD recommendations. The first pilot focused on banks, which involved 16 participating institutions and is due to release results in Q2 2018.
In related developments, Europe is driving climate-related risk disclosure and reporting practice development and is the one to watch in sustainable and green standards setting. The European Commission recently unveiled its Action Plan: Financing Sustainable Growth and announced it will develop a set of regulations with a vision to align its financial system with the transition to a low-carbon, resilient economy in accordance with the Paris Agreement. The plan lays out ten specific actions that were built upon the recommendations from a financial industry expert group appointed by the Commission. Indeed, the High-Level Expert Group on Sustainable Finance provided its view on a sustainable finance strategy in the EU earlier this year. Climate change-related disclosure is highlighted in Action 9, stating that the Commission will seek to develop corporate reporting guidelines in line with the TCFD recommendation. Its target date of completion is Q2 of 2019.
Meanwhile, the UK government-mandated Green Finance Taskforce went a few steps further in their recent report, recommending that the UK enforce climate-related disclosure in accordance with TCFD and seek to build a broader, more robust set of guidelines for non-financial disclosure in the future. The UK government tasked the group with formulating a strategy to accelerate the growth of green finance and take advantage of opportunities related to a low-carbon economy. The taskforce members include representatives from the financial sector such as London Stock Exchange, Barclays, HSBC and Aviva. At home, Canadian securities regulators released a report announcing it too would be developing climate disclosure guidelines, its focus being on how to enhance climate disclosures among publicly-listed companies.
As Mark Carney explained in his recent speech, climate disclosure preparers, financials and investors will continue to “learn by doing.” The market will then do what it does best with the improved information that is expected to become available: re-price risk, efficiently allocate capital accordingly and support the transition to a more stable economy.