Is Your Company Prepared for Increased Focus on Climate-Related Risks and Financial Disclosures?
As the costs and risks associated with climate change become more pronounced, the matter is working its way into risk and financial disclosures. In particular, leading public equity funds and private equity firms have taken steps based on a report by the Task Force on Climate-related Financial Disclosures (TCFD) to modify their reporting, both publically and privately, to investors. Accordingly, companies that have not already taken steps to assess the impact of climate-related risks on their operations should evaluate whether they should also do so.
Financial Stability Board’s Task Force on Climate-Related Disclosures
In December 2016, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) released its first report. The TCFD, chaired by Michael Bloomberg, was convened to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.
The report highlighted that climate-related risks and the expected transition to a lower-carbon economy affect most economic sectors and industries. In support, the TCFD cited a 2015 study by that estimated the value at risk, as a result of climate change, to the total global stock of manageable assets as ranging from $4.2 trillion to $43 trillion between now and the end of the century. “Much of the impact on future assets will come through weaker growth and lower asset returns across the board,” the study concluded.
After public engagement and consultation, the 32-member task force determined that preparers of climate-related financial disclosures provide such corporate disclosures in their mainstream (i.e., public) annual financial filings. The TCFD also made recommendations regarding the elements of climate-related financial disclosures. The recommendations are structured around four core themes:
Governance: The organization’s governance around climate-related risks and opportunities.
Strategy: The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
Risk Management: The processes used by the organization to identify, assess and manage climate-related risks.
Metrics and Targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
According to the TCFD, widespread adoption of its recommendations “will ensure that the effects of climate change become routinely considered in business and investment decisions” and “also help companies better demonstrate responsibility and foresight in their consideration of climate issues.”
Private Equity Funds Embrace TCFD Recommendations
Top equity firms, embracing TCFD recommendations, have also issued guidance relating to climate-change disclosures.
Earlier this year, State Street Global Advisors (SSGA), which manages over $2.4 trillion in assets, issued guidance regarding a broad range of environmental, social and governance (ESG) issues. It stated that SSGA is increasingly focused on board oversight of environmental and social sustainability in areas such as climate change, water management, supply chain management, safety issues, workplace diversity and talent development, some or all of which may impact long-term value. “While none of us can state definitively ‘the answer’ for a particular company, and we acknowledge that certain industries will face different issues, we believe that over time these areas can pose both risks to and opportunities for long-term returns,” the guidance stated. “Therefore, as stewards, we are convinced that addressing ESG issues is a good business practice and must be part of effective board leadership and oversight of long-term strategy.”
With specific regard to climate change, SSGA advised:
The TCFD’s recommended disclosures inform State Street’s analytical framework for evaluating the degree to which company boards are adequately addressing climate and sustainability in company strategies. The State Street framework reviews and categorizes a company’s approach to sustainability according to three criteria:
Has the company identified material environmental and social sustainability issues relevant to its business?
Has the company assessed and, where necessary, incorporated the implications of relevant environmental and social sustainability issues into the company’s long-term strategy?
Has the company adequately communicated its approach to sustainability issues and its influence on strategy?
In March, BlackRock, which has $5.1 trillion in assets under management, also issued updated guidance naming climate change a top priority. It stated:
Climate risk will be one of the key engagement themes that the Investment Stewardship team will prioritize in 2017 and the team’s recent work on this issue and its engagement and contributions to external initiatives such as the TCFD will inform our assessment of shareholder proposals on the topic. Over the course of 2017, we intend to engage companies most exposed to climate risk to understand their views on the recommendations from the TCFD and to encourage such companies to consider reporting against those recommendations in due course. For directors of companies in sectors that are significantly exposed to climate risk, the expectation will be for the whole board to have demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk. Assessments will be made both through corporate disclosures and direct engagement with independent board members, if necessary.
In industries most impacted by climate change, boards should be prepared to demonstrate to investors that they are taking the issue seriously. For those who have not yet started, the TCFD’s recommended disclosures are an excellent starting point. As with all corporate disclosures, it is advisable to work with experienced counsel to ensure that your disclosures are tailored to the unique circumstances of your company.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Jeffrey Cassin, at 201-806-3364.
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