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The Bruce Column — Explaining the issues around climate-related financial disclosures

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05 Apr 2017

As Special Advisor to the Financial Stability Board’s Climate-related Financial Disclosures Task Force, the body which produced the Recommendations of the Task Force on Climate-related Financial Disclosures, Russell Picot, is at the forefront of efforts to encourage the disclosure of climate risks in annual reports. Robert Bruce, our regular, resident columnist has interviewed him and reports on the latest progress.

We are now in the midst of the period when the comments on the Recommendations of the Task Force on Climate-related Financial Disclosures are being assessed. A final report is promised by the middle of the year. And one of the key people assessing the comments is the task force’s special advisor, Russell Picot. Picot has a long pedigree in this field. He was in at the beginning of the Prince of Wales’ Accounting for Sustainability project. For years he was in command of financial reporting at HSBC. He is an ambassador for the International Integrated Reporting Council and chairs the judges for the Finance for the Future Awards. And he wears an asset-owner’s hat as well as a director of the HSBC UK Bank Pension Trust and chairman of its asset and liability committee. 

We sat down together for an interview the other day, to talk through the issues behind the Recommendations of the Task Force on Climate-related Financial Disclosures. ‘Its objectives’, he said, ‘were to come up with recommendations within a voluntary framework for information to be published around climate risks and which would provide for information which would enable stakeholders to understand the distribution through the financial system of holdings of climate-related and carbon-related assets’. 

For Picot much of this stems from two pressures. First, the understanding of physical risks to assets from extreme events and secondly, the Paris Agreement adopted at the UN Climate Change Conference in 2015, that, as he puts it, ‘we should move to a low carbon global economy’. For Picot ‘that was a real game-changer’. ‘That will affect all businesses in all different sectors to some extent’, he said. And part of the Bloomberg agenda was, he said, simply ‘how do we give the market the information that quite frankly they are missing at the moment’. In his view it is a simple equation. ‘We do need to see a significant improvement in the quality of both quantitative and qualitative financial information’, he said. That would ‘make sure that climate risk is properly priced into decisions and capital allocation for equity and debt and credit’. That, Picot argues, ‘will reduce risk and be of interest to the beneficiaries of the pension schemes and other asset holders’. 

And this will have a knock-on effect. ‘Our recommendations would move climate change into the mainstream’, he says. ‘It would be a step forward for most companies to actually think about this through their mainstream processes’. The report recommends that the disclosures should sit in the annual report as a mean to reach a wider stakeholder base. ‘This is because we want to drive this into the mainstream’, he said, ‘and also because we believe there is strong stakeholder interest in this information being subject to the highest quality of internal assurance’. 

We are back to the mantra of what gets measured, gets managed. ‘When you ask a company to make disclosures things happen’, he says. ‘The CFO gets interested, because it is a public disclosure. The audit committee chair gets engaged and then the normal reporting processes kick in. That tends to lead to a good structure, good discussion and a dialogue in the boardroom’. For Picot this is one of main objectives of the report’s recommendations. ‘One of the great benefits of our work is to actually bring a proper discussion about climate risk and its impact on strategy and the business model into boardrooms’, he said. But he doesn’t want to scare the horses. He stresses that there is a concept of materiality in the recommendations. If having considered the issues companies feel that climate risk is not material then they can simply disclose how they considered the governance and strategy aspects and that would be it. Though for more complex situations the report does recommend the publication of scenario analysis. 

Picot sees the report as an opportunity for the finance function. ‘As we have seen through the judging of the Finance for the Future Awards’, he said. ‘There are some really exciting examples of talent within finance functions who are making a really important contribution. I think this is a very good opportunity for the finance function to really understand what is an emerging mainstream business risk and to really help the organisation shape the way it thinks about it and to craft external disclosures which will be helpful’. 

Looking five years ahead Picot would ‘like to see the broad spectrum of asset owners really understand the climate risk in their portfolios and use the information to make better decisions and to call on their fund managers to use this information when they are running their funds and for the managers in turn to be demanding the information from the companies’, he said. ‘And it is only by having all these elements within the investment chain working properly that will we actually manage to deal with the issue’. 

Picot, again thinking of his experience chairing the judging panel for the Finance for the Future Awards, sees all this as being part of the way the world is changing. ‘In the judging of the awards I got a sense of what the younger generation wants to happen’, he said. ‘I think they have a real and genuinely keen interest in what their savings are being used to do. The younger generation are going to typically be members of a defined contribution scheme and the pension they will get many years in the future is going to be a function of the amount of money they put in and the investment return’, he said. ‘I sense they want more than that. They want to know what their money is being used for and they worry about issues like climate risk and sustainable investing. I see that as being a significant and growing force for good and we have started to see the asset management industry responding. We are starting to see some really interesting innovations around some of the defined contribution investment products as a consequence’. 

But Picot stressed that what the report calls for underlines that there is no substitute for the traditional rigour of financial disclosure. ‘Shareholders’, he said, ‘need to understand the financial condition of the companies they are investing in and understand the stewardship’. But the landscape is changing. ‘There is no doubt that broader society wants more than that’, he said. ‘And climate risk is part of that. I think there is a lot of interest in organisational thinking around the UN Sustainable Development Goals, for example’, he said. ‘I don’t think this is some sort of overnight fad’, he said. ‘I think this is a genuine change in terms of what the world is demanding from the business community who in turn is responding very practically to that change’. 

Meanwhile the sifting and assessing of over 300 comment letters continues. ‘They show very strong support from asset owners and fund managers’, he said, ‘and perhaps unsurprisingly less wholehearted support from the corporate reporting world, probably because it is a voluntary framework and they can see the costs attached to that and see less of the benefits.’ The final version of the report will be with us by the middle of the year.

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