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The Bruce Column — Ensuring Climate-related financial disclosure goes mainstream

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18 Jul 2017

The final Report of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures has now been published. Our regular columnist Robert Bruce reports on its recommendations and how it is likely to move this issue into the mainstream.

The focus on climate-related concerns has changed. It has moved away from simple worries about global resources to a much more tangible concern about risks and opportunities. The final Report from the Financial Stability Board’s Task Force on Climate-related Financial Disclosure is expected to change attitudes to the quality of and responsibility for climate-related corporate reporting fundamentally. The old idea that such issues can be downplayed as simply high-minded concerns rather than being seen as the arena for serious risk assessment and resulting action will then, in turn, change. The Report focuses on the information that investors need.

It starts from the position that climate-change risks are one of ‘the most significant, and perhaps most misunderstood, risks that organisations face today’. Its recommendations and disclosures aim to ensure that investors, lenders and insurance underwriters are provided with a full understanding of those risks. And while the disclosure recommendations may be voluntary the clear expectation is that momentum and the market will demand their implementation.

The Task Force makes it clear that its recommendations ’aim to be ambitious, but also practical for near-term adoption’. The Report says that organisations already reporting climate-related information should be able to implement the recommendations ‘immediately’ and are ‘strongly encouraged to do so’. Others can begin ‘by disclosing climate-related issues as they relate to governance, strategy, and risk management practices’. The Report says the Task Force ‘recognises that this may be challenging but believes that by moving climate-related issues into mainstream annual financial filings, practices and techniques will evolve more rapidly’.

There are four fundamental areas of disclosure. First an organisation’s governance around climate-related risks and opportunities, then the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning. Thirdly the processes used by the organisation to identify, assess, and manage climate-related risks; and finally the metrics and targets used to assess and manage relevant climate-related risks and opportunities. 

The Report highlights that the Task Force ‘expects the governance processes for these disclosures would be similar to those used for existing public financial disclosures and would likely involve review by the chief financial officer and audit committee, as appropriate’. In other words the disclosures are clearly tied to the more general responsibility to present a clear, balanced and understandable discussion by publicly-listed organisations. The disclosure of climate-related risks and opportunities is firmly placed in mainstream financial reporting. 

Support has been swift from the asset owners and asset managers’ community. And it is clear they intend driving a swift and widespread adoption of the framework. For example, Stuart Gulliver, CEO at HSBC, said that: ‘These recommendations are very welcome. The impact of climate change and the transition to a lower-carbon economy deserve board-level scrutiny and governance. Independent research commissioned by HSBC shows that less than a quarter of companies currently disclose their environmental impact. This makes it very difficult for analysts and investors to assess and compare how sustainable these companies are. These recommendations are a practical and pragmatic response to the need for consistent and comparable climate-related financial disclosure’. 

More than a hundred firms around the world with a total market cap of some $3.3 trillion have agreed to actively support implementation and encourage others to do so. The Task Force will remain in place until at least September 2018 to promote and monitor adoption and to evaluate ‘the extent to which the recommended disclosures are meeting the interests of users’. With the backing it has, the move mainstream of climate-related financial disclosure is well under way.

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