Business leaders back G20 task force recommendations on climate-risk disclosure

Exposure to climate-related disasters such as floods, storms or sea-level rise can have a huge impact on property and infrastructure, destroying value and raising insurance rates overnight. [Source: EC - Audiovisual Service]

Over 100 business leaders worldwide have backed the final recommendations of a global task force set up by the G20 to disclose how companies manage climate-related risk, in a move that could divert trillions of investments away from polluting fossil fuels.

The Task Force on Climate-Related Financial Disclosures (TCFD) issued its final recommendations on Thursday (29 June), urging companies to report on how they manage the risks to their business from climate change and greenhouse gas emission cuts.

A rise in temperatures of six degrees this century would see $43 trillion wiped off the value of financial markets, according to research commissioned by Aviva, the UK insurance company. This makes company disclosure vital to ensure investors have the information they need to assess the impact of climate risk on their portfolios.

If the task force recommendations were followed through, it would divert trillions of dollars away from fossil fuels, as investors pull their money out of polluting industries and flee for the long-term security of clean technology assets like renewables energies.

EU pushed towards ‘climate disclosure’ regime for investors

Pressure is building on global regulators and the European Commission to “stress-test” portfolios of large institutional investors against long-term objectives to reduce climate change, in a move that could shift billions in investment away from fossil fuels.

The TCFD was called for by the Group of 20 economies and set up by the G20’s Financial Stability Board (FSB). Its recommendations are voluntary, but when the task force issued its draft report in December 2016, some of its members argued they should become mandatory.

“While we welcome the recommendations, we don’t believe voluntary disclosures will get us far enough, fast enough to effectively combat climate change,” said Steve Waygood, Chief Responsible Investment Officer at Aviva Investors.

“Research shows it is only when governments mandate disclosure that you get it at the scale required to make it consistent and comparable,” Waygood said in a statement issued in February.

As the task force issued its final recommendations on Wednesday (28 June), it received backing from over 100 business leaders who publicly committed to support them. The CEOs signing up to the recommendations came from companies representing over $2 trillion in revenues and with over $11 trillion in assets under management, including EDF, Unilever, HSBC Holdings and Swiss Re.

Michael Bloomberg, the chair of the task force, commented: “Climate change presents global markets with risks and opportunities that cannot be ignored, which is why a framework around climate-related disclosures is so important.”

There are three main types of climate-related risks, according to Aviva:

  • Physical risk to investment assets posed by extreme weather events such as floods and droughts, which can hit property valuation.
  • Transition risk, referring to hazards associated with the transition to a low-carbon economy. The implementation of a global carbon budget, for example, would render the vast majority of fossil fuel reserves ‘stranded’ or unusable, hitting extractive companies’ business models.
  • Litigation risk, which is related to the potential effects of compensation claims on carbon extractors and emitters.

FSB Chair Mark Carney said: “The Task Force’s recommendations have been developed by the market for the market. They set out the disclosures that a wide range of users and preparers of financial filings have said are essential to understanding a company’s climate-related risks and opportunities.”

In Europe, few companies have taken the step to disclose their exposure to climate risk, however. A survey by the WWF of the 80 largest asset owners in Europe showed that only 30 agreed to disclose their data.

“More efforts will be needed to improve the lack of disclosure of holdings data, in part due to a current lack of regulation requiring so in some countries,” the WWF said, calling on the task force recommendations to be made mandatory.

The TCFD will bring its final recommendations to the G20 at its meeting in Germany in July.

Similar efforts are underway at European level. In December, the European Commission set up a High Level Expert Group on sustainable finance to work on climate-related financial disclosure and other sustainability reporting recommendations. The group is expected to conclude its work in December.

Green finance reaches EU policy ‘tipping point’

The mid-term review of the EU’s Capital Markets Union initiative, due on Wednesday (7 June), will mark another step towards the mainstreaming of green finance in Europe, a senior EU official told EURACTIV.

Positions

Peter Damgaard Jensen, CEO of Danish pension fund manager PKA and Chair of the Institutional Investors Group on Climate Change (IIGCC) said, “Investors are pleased to see this industry-led forum publish a robust framework applicable across all sectors and jurisdictions. Greater climate related financial disclosure in line with the TCFD’s four widely adoptable recommendations is crucial to secure more complete, meaningful, reliable and consistent data across all companies and sectors. Given their importance at the top of the investment supply chain, large asset owners and asset managers also recognise they have an important role to play in driving the swift and widespread adoption of this framework. “

Philippe Defossés, CEO of French pension fund ERAFP and Vice Chair of IIGCC  said, “The more companies report effectively on climate related risks and opportunities, the easier it becomes for investors to allocate the substantial amounts of capital required to implement the Paris Agreement and to work on their own climate risk disclosure. There should be no resistance to the widespread adoption on the TCFD’s recommendations given how - in most G20 countries -  companies already have legal obligations to disclose material risks in their routine financial filings, including those that related to climate change. Moreover, with its remit now extended to 2018, the TCFD is well placed to monitor implementation and take-up its framework closely.”

Gerald Cartigny, Chief Investment Officer (CIO) at Dutch asset manager MN said, “The TCFD’s framework provides a good foundation for improving the ability of investors and others to appropriately assess and price climate related risk and opportunities. It is particularly valuable that one of the key disclosures recommended by TCFD is focused on the resilience of a company’s business strategy regarding climate-related risks, including a scenario designed to curb global average temperature rises to 2C Celsius or less. Such analysis is crucial for investors seeking decision-useful, climate related financial information.”

Graeme Pitkethly, Chief Financial Officer at Unilever said: “It’s fundamental for every good business to manage and communicate risks and opportunities. We are already obliged to disclose material risk. Climate change is no different. It’s a risk that is already affecting companies today – both through the impacts of steadily rising global temperatures and through the policies that governments around the world adopt in response.

"As part of the task force, we have put together a standardised framework for companies to disclose climate-related risks and opportunities, focusing on making them as practical as possible to adopt. Why? Because markets need information to operate efficiently. We have to be transparent to help investors make better decisions for the long term. And beyond the markets, we know that transparency is increasingly important to our consumers too. They want to know the values of the companies they are buying from, particularly millennials. The same goes for the young talented future leaders we all wish to recruit.

I’d urge all companies to read this report and adopt the recommendations.”

Ben van Beurden, CEO of, Royal Dutch Shell plc, said: “I agree that companies should be clear about how they plan to be resilient in the face of climate change and energy transition. I believe it is right that it should be transparent which companies are truly on firm foundations over the long-term. I not only applaud the Task Force for its work to achieve this aim but I have signed a letter confirming Shell’s support for the initiative. The details matter and I look forward to Shell working with the Task Force on those details. Specifically, how we present forward-looking information in an uncertain world, the disclosure of commercially sensitive data and the feasibility of providing the suggested detail to the standard required of financial filings. Ultimately, however, both Shell and the Task Force want this plan to be fit for purpose.”

Heather Coleman, Climate and Energy Director at Oxfam, said: “The TCFD recommendations on climate risk disclosure are an important step in meeting the commitments of the Paris Agreement.  While it’s encouraging to see many mainstream investors backing these recommendations, it’s vital that the G20 adopt these recommendations and translate them into national reporting requirements.  As millions of people around the world become increasingly vulnerable to the impacts of climate change, governments have a responsibility in making financial flows consistent with low emission, climate resilient development pathways.”

Background

The European Systemic Risk Board, an EU advisory body set up during the 2008 financial crisis, has warned about the risks of moving too late and abruptly towards a low-carbon economy.

Banks which are exposed to ‘carbon-intensive’ or CO2-heavy assets could face systemic risks, it warned in a report published in February.

“Policymakers could aim for enhanced disclosure of the carbon intensity of non-financial firms,” says the board’s report, Too late, too sudden. “The related exposure of financial firms could then be stress-tested under the adverse scenario of a late and sudden transition.”

Central Banks have equally warned about consequences of a sudden transition. “Extreme weather events raise costs for insurance companies, reduce investment valuations and lower the value of collateral posted for bank loans,” the Bank of Finland said in a statement released on 22 March.

“It is important to ensure that the financial markets and their participants, as well as the supervisory authorities, are aware of the effects of climate change on financial stability,” said Erkki  Liikanen, a former EU Commissioner in charge of digital policy who is now Governor of the Bank of Finland.

The Bank of England issued a similar warning in December, saying investors faced huge potential losses from climate change.

The warning was followed by the creation of a new industry-led global taskforce under the aegis of the G20. Launched during the UN climate conference in Paris, the Task Force on Climate-related Financial Disclosures (TCFD) was set up to develop “voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders".

Its final report is being made public on 29 June 2017.

Timeline

  • 7-8 July: G20 meeting in Hamburg, Germany.
  • 10 July: EU High-Level Expert Group on sustainable finance presents interim report.
  • December: Final report from EU High-Level Expert Group on sustainable finance.