On December 14th 2016 the Financial Stability Board’s Task Force on Climate Related Disclosure published its long-awaited recommendation report. The report sets out recommendations for helping businesses disclose climate-related financial risks and opportunities.
The report states that the impact that global warming can have on economies is widely recognised. However, at present, it is difficult for investors to know which companies are vulnerable to climate risks. It is recognised that without financial disclosure, the financial impacts of climate change may not be effectively priced. Pricing of risk is an essential function of financial markets. It it is increasingly important to also understand the governance and risk management context in which financial results are achieved.At present, it is difficult for investors to know which companies are vulnerable to climate risks.Click To Tweet
The Task Force states that non-financial disclosures should be:
- Adoptable by all organisations
- Included in financial filings
- Designed to solicit decision-useful, forward-looking information on financial impacts
- Strong focus on risks and opportunities related to transition to lower-carbon economy
The Task Force’s recommendations apply to all financial sector organisations including real estate asset managers and owners. Importantly, it is recognised that large asset owners and asset managers sit at the top of the investment chain and, therefore, have an important role to play in influencing the organisations in which they invest to provide better climate-related financial disclosures.
Recommendations are structured into four categories, as summarised below.
Organisations should disclose their governance approaches covering climate-related risks and opportunities.
- The board’s oversight of climate-related risks and opportunities
- Management’s role in assessing and managing climate-related risks and opportunities
Organisations should disclose actual and potential impacts of climate-related risks and opportunities.
- Climate related risks and opportunities the organisation has identified over the short, medium, and long term
- The impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning
- The potential impact of different scenarios, including a 2°C scenario, on the organisations businesses, strategy, and financial planning (a clear link to the adoption of science based targets)
Organisations should disclose how they identify, assesses, and manage climate-related risks.
- Processes for identifying and assessing climate-related risks
- Processes for managing climate-related risks
- Processes for identifying, assessing, and managing climate- related risks are integrated into the organisation’s overall risk management
Metrics and Targets
Organisations should disclose how metrics and targets are used to measure and manage risk.
- Metrics used to assess climate risk
- Scope 1, 2 and if appropriate (3) GHG emissions
- Targets used to manage climate change risks and opportunities
To underpin these recommendations, the Task Force also sets out seven principles for effective disclosure.
- Disclosures should represent relevant information
- Disclosures should be specific and complete
- Disclosures should be clear, balanced, and understandable
- Disclosures should be consistent over time
- Disclosures should be comparable among companies within a sector, industry, or portfolio
- Disclosures should be reliable, verifiable, and objective
- Disclosures should be provided on a timely basis
The Task Force’s recommendations provide a foundation to improve investors’ and others’ ability to appropriately assess and price climate-related risks and opportunities. They are wide ranging but also practical in the near term allowing the financial industry to develop and grow capability to report within a structured framework.
For information and if you want to get more involved, a public consultation to solicit views on the Task Force’s recommendations is now open until 12 February 2017 and can be accessed here.