Paul Simpson: What Carney’s Task Force needs to do next to reshape capital markets

The TCFD has the potential to create a virtuous cycle of performance improvement

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When CDP began securing climate disclosure from companies in 2002 it was seen as innovative and novel. This year nearly 6,000 companies, representing close to 60% of global market capitalization, disclosed through us. These companies represent all sectors, are from over 90 countries and disclosed together with over 500 cities and 100 states and regions.

The recommendations released by the Financial Stability Board’s Task Force for Climate-related Financial Disclosures this week mark a step change in the integration of climate information into mainstream financial reporting. But are they game-changing? How can they be implemented and what is the impact? And what does this mean for CDP and the future transition to a low carbon economy?

At CDP, we welcome the recommendations and the leadership of the Task Force, which will help achieve our shared goal to drive disclosure forward. I believe the glass is already more than half full with environmental disclosure. We must now fill it.

Firstly, the recommendations will bring climate change governance firmly into the boardroom as every board must consider and then take responsibility for signing off on mainstream filings. It will ensure climate risk information is disclosed with the same rigour as financial information and enable investors to hold boards to account for their management of climate risk.

Secondly, all companies will need to describe the potential impact of different scenarios, including a 2°C pathway and disclose the impacts, bringing the “future” of climate risk into the present. This has the effect of making this actionable today rather than filing it away in the ‘too difficult’ drawer for another day. Finally, encouraging both financial and non-financial organizations to adopt the recommendations will ensure more accountability across the financial value chain. This has the potential to create a virtuous cycle of performance improvement as the more investors assess portfolio impacts of climate change, the more they will engage with companies on climate governance.

These recommendations are a step forward because of the recognisable leadership represented by Mark Carney, Michael Bloomberg and the Task Force members. When Mark Carney first talked about ‘Avoiding the tragedy of the horizon’, financial and non-financial organisations looked up. The Task Force has consulted across industries and a diverse range of companies to produce a roadmap. The next critical step will be the engagement process through the public consultation period to reach out to stakeholders, listen to feedback, building wider support for the recommendations from companies and investors in the process.

Do the recommendations go far enough?

The TCFD’s voluntary recommendations are aimed at driving the integration of climate information into mainstream filings and developing a broader understanding across boards and investors. We are strong advocates for mandating disclosure as investors need full information across their portfolios and there will always be some companies who resist voluntary norms. We believe policy intervention is necessary to drive the right cultural behaviour and action required by companies. The next step will be for the G20 governments to consider whether such disclosure should become mandatory over time.Transitioning the TCFD recommendations from voluntary to mandatory requirements will take time. The Paris Agreement signalled the start of governments stepping up their efforts to tackle climate change. However, their commitments offer a varying degree of specificity to address the aggregate climate burden budget. As recognized by Mark Carney himself, the current country pledges do not go far enough to achieve a below 2°C world. Failing to hit this mark will increase systemic risk to the financial system. If governments are serious about the Paris Agreement then mandating disclosure will ensure markets have the information to navigate the transition.

So what does this all mean for the future of CDP?

The fact that the FSB follows the lead that CDP began some 15 years ago is testament to the value of our work and the changes we have catalysed in capital markets. Before CDP was established, there was no system in place to provide investors with the information to evaluate climate risk and opportunity. We are now an integral part of global efforts in meeting the goals of the Paris Agreement and enable market actors to track progress against those goals. Our work is far from done.

We need climate disclosure to become common practice for all and we are responding to the evolving landscape through our new Reimagining Disclosure initiative, designed to continue the transition to a low-carbon economy through the implementation of sector based disclosure and adoption of the TCFD’s recommendations by the end of 2017.

Companies need to go through a robust measurement and data collection process to be able to integrate into their mainstream filings the forward-looking strategic information the TCFD recommends. By participating in CDP, companies are in a far stronger position to meet the TCFD recommendations because they can better flex their disclosure muscles in front of investors. The Climate Disclosure Standards Board’s (CDSB) framework provides the guidance for companies to transform their data into the language of mainstream reports. Together, we help keep companies in shape to perform successfully in a low-carbon world.

Delivering a well below 2°C, financially stable world will be achieved through collaboration. CDP and CDSB will continue to ask the relevant questions on a global platform helping companies prepare for TCFD adoption. We will also analyse disclosure across sectors to provide insights that will enable capital markets to prepare for a more sustainable future.

But we are here to act as more than just the facilitator for the TCFD recommendations, we are here to ensure markets transition to a well below 2°C world. This is why we are now working with over 200 major multinationals who are committed to setting science based targets and over 1,200 who are adopting internal carbon pricing, which increased by 23% across markets on last year, notably in Asia. We need to look ahead, encouraging organizations to strive for further advances on the road ahead. CDP has an important role to play now and in the future as the markets’ institutional memory in the drive for better, more effective disclosure and climate change performance.

Paul Simpson is the CEO at CDP and a board member for CDSB.