What is climate change risk disclosure?
In recognition of the risks climate change could pose to businesses, there is a growing call for companies to disclose the risks they are facing from both the physical impacts of climate change and the transition to a low-carbon economy. The idea is that disclosure will help companies prepare for climate change impacts, and help investors understand risks so that they can make more informed investment decisions. This is easier said than done, raising questions of how companies should assess and report these risks, including whether the disclosures should be mandatory.
Why can’t climate change fit in existing disclosure rules?
In many countries, public companies – i.e. companies whose shares can be bought and sold by the general public on a stock exchange – are legally required to file annual reports on their financial performance. In the US, for example, public companies must disclose financial data as well as a description of material risks that could materialize over the coming year. In principle, climate change risks could be incorporated into these existing disclosure rules, but there are several challenges.
Obliging companies to include climate risk would require closer monitoring and enforcement by the relevant authorities. The yearly reporting framework could also miss out on long-term risks arising from climate change. And climate change risks can be complicated and difficult to anticipate, depending for example on the speed of technological development (like the deployment of renewables) and the level of future greenhouse gas emissions (with higher emissions, and higher temperatures, posing a greater threat of climate damages).
What is the Task Force on Climate-Related Financial Disclosures? What’s next?
In recognition of particular challenges involved in assessing and reporting climate change risk, the Financial Stability Board (FSB)– an international body made up of G20 member states that oversees global financial stability – created the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD is an industry-led initiative made up of representatives from various sectors including banks, insurance companies, and non-financial corporations. In June 2017, they published their final report, which recommends that companies include climate-related financial disclosures in their annual financial filings.
Should disclosure be mandatory?
Existing voluntary initiatives like the Carbon Disclosure Project have been a good starting point for the discussion, but not all companies participate, and their disclosures can be inconsistent and patchy.
The TCFD’s recommendations are entirely voluntary, and converting the recommendations into requirements will require some work on practical details. For example, the FSB TCFD recommendations outline scenario analysis as a way for companies to think through possible future scenarios of how climate change could affect their business operations. But designing appropriate scenarios is easier said than done, and sector- and country-specific scenarios may be necessary. The UK Government supports the TCFD recommendations in principle, though the question of implementation is still under discussion through the Green Finance Taskforce.