For the last 18 months financial heavyweights Mark Carney and Michael Bloomberg have been attempting to solve one of responsible investment’s most long-running challenges – how to develop consistent climate-related financial risk disclosures from companies across all sectors, including financial services.
This July, the Bloomberg/Carney Task Force on Climate-Related Disclosures (TCFD) will submit its final recommendations to G20 leaders in Hamburg and that report is likely to become a vital part of the global transition to a low carbon economy.
What does this mean for portfolio companies?
The TCFD is calling for climate reporting to be standardised into our key areas:
- Governance: For example, companies should show they have ‘climate-competent’ Board supervision of climate-related risks and opportunities.
- Strategy: For example, companies should undertake scenario analysis exercises to examine the impact of different climate scenarios on business operations, including aligning with the targets set out in the Paris Agreement.
- Risk Management: For example, companies should show robust processes to identify, assess and manage climate-related risks, such as setting Science-based Targets, aligned with keeping global temperature rise well below 2°C.
- Metrics and Targets: For example, companies should show they have tools to measure, assess and manage relevant climate-related risks and opportunities.
CDP has run several workshops around the world on climate reporting throughout 2017 and many of the CEOS we have spoken to are concerned that the TCFD recommendations will add to their reporting burden. However, the intention is the exact opposite.
The aim of TCFD is to create a common framework for climate disclosure globally and inform evolving regulatory demands. This should mean valuable efficiency gains for CFOs and their teams. Indeed, CDP has committed to adopt TCFD recommendations in their entirety within our disclosure platform for 2018.
Some CEOs are also concerned about their legal liability should they set emissions reduction targets for ten years’ time but are then unable to meet them. However, like any other long-term corporate targets (for example, sales growth) such performance is unlikely to become legally enforceable, and unless we see the mandatory introduction of TCFD this will be judged by the court of public opinion.Are the reporting requirements the same for investors too?
The main outcome of the TCFD process for investors should be that they are able to make better and more informed investment decisions around both climate risk and opportunity. However, investors should note that the recommendations apply to the financial sector (banks, insurers, asset owners and asset managers) too.
For example, investors will be expected to show how actual and potential climate related risks and opportunities are factored into overall investment strategy and how climate scenarios inform investments in specific assets. The TCFD also recommends that asset managers should provide a general description of engagement activities with investee companies and outline the position of their portfolio with respect to a low-carbon transition. Funds like WHEB Asset Management in the UK have already committed to use TCFD, as part of their new impact report.
At CDP, we additionally recommend that investors detail any plans to increase the percentage of stocks with a Science Based Target (to keep global temperature rise below 2°C), as this provides a useful and simple way of demonstrating the portfolio manager’s commitment to low carbon transition.
Integrating TCFD into investment analyses – help is at hand
At CDP we are working to support investors in their efforts to integrate climate risk and opportunity into portfolio management. Our quarterly investor research reports on high emitting sectors, such as oil & gas and automobiles identify the most material climate related metrics for each sector and how they link to financial performance. These reports now analyse companies under the key TCFD pillars – transition risk, physical risk, transition opportunity and governance.
We are careful to use broad language of the TCFD in shaping our analytical frameworks and will adopt the TCFD recommendations in their entirety within our disclosure platform for 2018.
The recommendations of the TCFD may prove to be one of the most significant pieces of the puzzle in the efforts to realise the transition to a low carbon economy. They catalyse progress to keep a global temperature rise below 2 degrees by putting climate disclosure firmly in the field of global financial stability. As the founder and driver of global climate disclosure we look forward to July. At CDP we will continue to innovate with our work on carbon pricing, Science Based Targets and scenario analysis helping companies and investors make the right decisions for long-term profitability and sustainability.
Rick Stathers is Head of Investor Initiatives at CDP.