The Task Force on Climate-related Financial Disclosure (TCFD) is designed to develop guidelines for companies on providing information in financial markets. It was born out of a G20 initiative of Finance Ministers and the leadership of Mark Carney, Bank of England Governor and Chairman of the FSB. We believe there are a few key initial takeaways from the appointment of Michael Bloomberg as Task Force Chair, and its prospective work.
From non-financial companies to issuers. Transition risks are unlikely to be related to a single sector or asset class. In this context, non-financial corporate disclosure is only one piece of the puzzle, with other elements relevant e.g. government, infrastructure, and financial market actors themselves, including banks and investors. Most existing data platforms providing climate-related data to investors do not cover such a broad universe yet.
From carbon data to transition risk data. As evidenced by our recent research, carbon intensity data currently used by most climate-aware investors is not significantly correlated with financial risk exposure related to carbon policies. Genuine risk metrics are required. One example is the European Energy Transition Risk & Opportunities (ET Risk) project, led by the 2° Investing Initiative and involving Standard & Poor’s, Carbon Tracker Initiative, I4CE, Kepler-Cheuvreux, the CO-Firm, and the Oxford Stranded Assets Programme.
From corporate disclosure to big data. The data required from issuers to inform proper risk analysis should be forward-looking (e.g. future production capacity for electric utilities), geolocalized (in order to analyse exposure to local policies and climate change impacts), and comparable with multiple scenarios. This type of reporting requires the creation of data aggregation platforms fed with multiple sources rather than only relying on the corporate annual reporting model. Our pilot framework to assess equity portfolios alignment with climate scenarios bypasses corporate reporting almost entirely – instead relying on industry databases to get global coverage.Capital expenditure data is a case in point, with big emphasis by some to improve reporting here. This is despite the fact that at least for utilities, automobile, coal, and oil & gas, capital expenditure data already exists in industry databases. Without it, the Carbon Tracker Initiative would never have been able to publish their cost curves work. The barrier in this case isn’t the data, but the ease of access to the data, notably related to costs. If policymakers think this data is a public good and necessary for transition risk management, it will be an order of magnitude more efficient to provide this data directly, rather than rely on voluntary corporate reporting, and all the costs that come with it.
From big data to incentives. Disclosure is not a panacea. To overcome the tragedy of the horizons around transition risk management, theme of our new research with Generation Foundation, policy action will be necessary, as noted by the Banque de France Governor at our conference recently. Incentives around investment decisions in financial markets will need to evolve. In France, we partnered with the Prime Minister’s economic think tank France Strategy to explore the potential role of tax breaks on investment products with an emphasis on making these consistent with climate policy goals.
From risk to making the transition happen. Finally, our research on how investors currently use climate metrics suggests that they almost exclusively driven by corporate reputation management and product marketing. Furthermore, recent publications by Moody’s and Mercer suggest limited materiality of climate-related risks in the next few years for broadly diversified investors. At the end of the day, our analysis and the recent French law imply that the potential demand from investors around the ‘contribution of issuers to making the energy transition happen’ may be equally relevant as the ‘transition risk management’ demand.
Jakob Thomä and Stan Dupré are, respectively, Program Manager and Founder & Director at the 2° Investing Initiative.