March 22, 2018
Guest post by Richard Samans and Simon Messenger. Richard Samans is Chairman of the Climate Disclosure Standards Board and Managing Director and member of the Managing Board of the World Economic Forum. Simon Messenger is Managing Director of the Climate Disclosure Standards Board.
Expectations of investors and regulators are changing regarding the obligation of companies to disclose the risks and opportunities posed by climate change for their businesses. Last year, an industry task force chaired by Michael Bloomberg, CEO of Bloomberg LP, and convened by Mark Carney, Governor of the Bank of England and Chairman of a group of the world’s top financial regulators, issued a landmark report calling for disclosure of such information in the mainstream (i.e., public) annual financial filings of a wide range of companies.
This Task Force on Climate-related Financial Disclosures (TCFD) concluded that the risk-return profile of companies many companies may change significantly as they are affected by physical impacts of climate change, climate policy, and new technologies. As a result, investors have a growing stake in the quality and consistency of climate-related information firms reported by firms to their owners and investors. Similarly, financial regulators have an interest in ensuring that the markets have sufficient information to price in these risks as early as possible in order to reduce the potential for disorderly movements in asset prices that could disrupt the wider financial system.
Many jurisdictions and firms are now moving to act upon these recommendations, which have set a new standard for what constitutes good corporate governance. The European Commission was the first to set a clear course of action, as its newly-released action plan on sustainable finance aims to reassess environmental reporting requirements by companies. In the UK, we expect to see in a few days’ time the Green Finance Taskforce deliver ten policy recommendations to help green finance grow.
In light of these changing expectations of companies and their boards, the Climate Disclosure Standards Board – a multistakeholder partnership of leading business and environmental organizations – set out to analyse the degree to which companies are prepared to disclose in line with the TCFD recommendations, and the extent to which they are moving from disclosure to action.
Our research covered 1,681 companies with market capitalisation of over US$ 30tn already disclosing to CDP (formerly Carbon Disclosure Project), across 14 countries and 11 sectors, and looked at the four areas of disclosure identified by the TCFD – governance, strategy, risk management and targets and metrics.
It found a significant gap between the number of companies identifying and owning climate-related risks and opportunities, and those that are acting to tackle them.
For example, most companies – three out of four – disclose climate-related risks they face in the short term (within six years), but around half do not disclose how they plan to manage the longer-term risks associated with the transition to a low-carbon economy.
Equally, although eight out of 10 companies assigned board-level responsibility for climate change, only one in 10 have management incentives linked to progress against climate change targets. Incentives can be seen as a proxy for how seriously an issue is being treated; and companies should make monetary and non-monetary incentives at board-level more widespread, as well as integrated climate-related matters into their corporate governance processes and strategy.
There is also significant geographical variation in how companies are responding to the TCFD recommendations. Companies in France, Germany and the UK are most prepared to disclose information across three of the four TCFD areas (governance, risk management, and metrics and targets). Similarly, around a quarter of companies in these jurisdictions provide incentives linked to climate targets.
This engagement with the TCFD can be closely linked to regulation. In Europe, a number of policy initiatives have mandated disclosure, including the EU Non-Financial Reporting Directive, Article 173 of France’s Energy Transition Law, and UK requirements for listed companies to disclose their carbon emissions. Conversely, US companies, which face less pressure on climate change, lag on most indicators.
However, while European companies may be ahead of the pack, they are by no means doing enough. The challenge now is to enhance disclosure where it is inadequate, and to take action to address climate risk where it exists.
Governor Carney’s concerns about climate risk are shared by investors. In recent months, giant fund managers such as Blackrock, Vanguard, Aviva and State Street have stepped up calls on the companies in which they invest to improve the quality of their exposures. Meanwhile, more than 250 investors, managing more than $28 trillion in assets, have come together in the Climate Action 100+ coalition, calling – among other things – for companies to report in line with the TCFD’s recommendations.
This investor concern is not new. Since 2000, a growing number of large investors have supported CDP in its advocacy of corporate environmental data disclosure, and in its development of a standardised reporting platform to help companies do so.
That financial regulators and big investors are increasingly sounding the alarm over climate change is to be welcomed, as is the fact that a growing number of companies are heeding the warning. But, if we are to meet the goals of the Paris climate agreement to keep global warming below the critical 2ºC threshold, companies need to move faster to position themselves for the low-carbon transition.Guest contributor