Ahead of this week’s publication (December 14) of the Recommendations Report by the Task force on Climate Related Financial Disclosure (TCFD), set up by the Financial Stability Board and led by Michael Bloomberg, RI speaks to Christian Thimann, Group Head of Strategy & Public Affairs and a member of the group Executive Committee at Axa, the French-based global insurer, who is one of four vice chairs of the TCFD. The draft report will be open for 60 days consultation upon publication.
RI: How did you get involved with the TCFD?
Christian Thimann: Some members of the TCFD were nominated by country members of the Financial Stability Board (FSB). In my case, I was nominated by the French government because I work in a company based in France that has been very active in this area.
RI: How would you describe the broad thrust of the TCFD’s work?
CT: I would describe it as having has two main roots. The financial stability root: the stranded assets kind of issue, where you want to avoid the bad surprises. The second root is the environmental, COP21 objective: you will only achieve this if you give investors better information to distinguish firms that are in line with the 2 degrees trajectory and those that are not.
RI: How should investors make sense of the work the TCFD is doing, especially around energy?
CT: I think investors should be thinking about concentric circles of industry emissions of CO2 where you have the coal sector at the centre as the prime source of CO2, then oil and gas, the broader energy sector, utilities and heavy industries, transportation, chemicals and then light industry. The issue of potential stranded assets is very different within all these sectors. They are much tougher in the centre. It’s certainly true that a lot of physical reserves of oil, gas and coal are today seen as financial assets on some balance sheets. And it could be that the transition is much faster than what we believe because of technology innovation, especially for the sectors near the centre of the circle.RI: And what should they be looking for more broadly?
CT: I would say the big advantage I see is that the work will help orientate finance over the long term. That is very useful because most of our social challenges are long term. The climate issue is urgent, but the ageing population, the retirement gap, the funding of education, and infrastructure, these are all long term challenges too. Social challenges are very rarely short term. Helping to orientate financial markets and central banks to the long term has a lot of good potential outcomes.
RI: Working in an insurance company, why is that your problem to be involved in?
CT: That’s very easy to answer, because the insurance sector is perhaps one of the only sectors who actually pays for climate risks. Flash floods in Cannes cost €500m to the French insurance sector… for 2 hours of heavy rain. Hurricane Katrina was a disaster for the people of New Orleans, but also the insurance sector.
RI: And your thesis is that it is linked to increasing climate change.
CT: Yes: frequency and severity. We believe that the world of plus two degrees would be just about viable; a world of plus 4 degrees would not. This is a real issue. In 2014, AXA paid about one billion euros in climate-related damages.
RI: So it is a bottom line issue. You could be paying out more than you take in premiums?
CT: Yes, and if the world goes to plus four degrees and we have these events all over the place, I’m not sure that insurance companies could continue operating as they do today.
RI: Getting some kind of unified reporting framework for companies on CO2, is that achievable in a meaningful way?
CT: Let me correct the question. We are not going to go for uniformity. What we have said is ‘long term and consistent’ information, which means something broadly comparable. But, today if you are an investor, you also have to look at climate risk and opportunities. At the moment, you have to examine speeches by CEOs, look at CSR reports, etc. A goal of the TCFD is to mainstream climate issues into financial decisions by bringing it into the mainstream reporting mechanism. If we are successful, in a couple of years, we will see more companies systematically publishing this information in their 10K and annual reports, with a dedicated section on climate risks.
RI: Do you think that a voluntary reporting mechanism can work?
CT: I believe it can because if you think again of the concentric circles, the pressure at the centre is very high, and difficult to avoid. Second, we hope that some firms will adopt leadership positions. We have engaged with many firms over the past 14 months, and there is positive momentum. I also believe that companies do not want regulation at this stage.
RI: Is there consensus on something as simple as how to measure CO2 emissions?
CT: We’ve put a lot of emphasis in the TCFD on how companies should think about reporting on CO2 and other important environmental information. CO2 emissions levels today are ‘pictures’, and investors are investing in a company based on what it will be worth in the future. So, ideally you need to see a ‘film’ of the company developing going forward. For this we are suggesting a lot of information about the strategy i.e. how do climate initiatives affect the short, medium and long term strategy goal of the firm, what would be in the financial plan, can you give us scenarios, etc. It’s a lot of forward information that is much more than just CO2 data. Companies could speak about R&D, investment opportunities, new technologies and also internal resourcing.
My hope is that this could be broadened to include water and waste management, pollution, fish stocks, deforestation, and so on, towards the concept of planetary boundaries.RI: How have the discussions with the TCFD gone?
CT: The dynamic of the task force has been very positive. The members are hugely motivated, very engaged and have devoted a lot of their time to it with enormous professionalism and from very impressive backgrounds. And behind every task force member are their related company teams and the other firms they engage in, in their sector and their constituency. I have been engaging with a lot of insurance companies and with a lot of companies in France and beyond.
RI: Are you surprised at the lack of attention that mainstream investors are giving the work of the TCFD?
CT: I don’t see a lack of attention: all the feedback we have had has been very positive.
RI: Projecting ahead, what would success for the TCFD look like in 3 years?
CT: The FSB has not specified what will happen, and so I will not prejudge that. But, what I would say is that a measure of success would be having the information ‘film’ I spoke about earlier as a regular feature in financial reports. We also believe there is a great opportunity for firms that are doing well to show that in a more public, systematic manner.