Thursday, August 5 2021

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Essential Corporate Disclosure of Climate Risk Data

Essential Corporate Disclosure of Climate Risk Data

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Most countries around the world are already committed to working toward net-zero harmful gas emissions by the middle of the century. There is now a call for corporations to be transparent in reporting their environmental impact. The United States is currently reviewing such reporting.

Efforts of the United States Government

The U.S. Securities and Exchange Commission (SEC) held a three-month conference on mandatory climate-related disclosures in March. There was a proposal to require U.S. businesses to disclose how they are affected by climate change. The argument was that without such disclosures, markets are not able to account for climate risk financially.

There will also be a problem because the UK and the European Union (EU) may soon make climate reporting mandatory for their companies. If the U.S. does not follow suit, the uneven global requirements will pose a global financial risk.

The proposal included broader disclosures in environmental, social, and governance (ESG) areas, the establishment of a standard-setter, and the question of requiring audits. The SEC expressed support for the International Financial Reporting Standards (IFRS) Foundation’s intention to create an ESG task force and set up the International Sustainability Standards Board.

Lawyer Sonia Barros, who previously worked with the SEC for 17 years, stated that the efforts of the SEC in the six months leading up to May are unprecedented and represent a major policy shift.

The U.S. Private Sector

Earlier in February, BlackRock, the world’s biggest asset manager handling $9 trillion in assets, stated that it can vote against companies if they refuse to report their carbon emissions. It added that asset owners and managers can make better-informed decisions if they have high-quality information based on consistent reporting standards. The world’s biggest private equity firm, Blackstone, wrote to companies in its portfolio in May, asking for better reporting across ESG topics.

The State Street Global Advisors (SSGA), handling $3.6 trillion in assets, also expressed support for greater sustainability disclosure by companies and stated that it is likewise prepared to use its voting power to push for this. Its head of ESG investment strategy for Europe, the Middle East, and Africa, Carlo Funk, stated that companies and their boards must show their awareness and sensitivity to matters regarding ESG.

Technological giants Apple and Uber already publish ESG reports and support its being mandatory. Uber’s deputy general counsel, Keir Gumbs, stated that their investors around the world asked them to make climate and sustainability commitments.

About 1,500 corporations, most of them multinationals, declared support for the Taskforce on Climate-related Financial Disclosures (TCFD). Only a small number among them publish reports according to its recommendations, though. According to the TCFD’s 2020 status report, many companies do not want to disclose confidential information and worry about the lack of a standard reporting framework.

Taskforce on Climate-related Financial Disclosures

The Taskforce on Climate-related Financial Disclosures (TCFD) aims to inform investors on which companies have the highest risk from climate change and which act on it. Its recommendations enable companies to present clear, consistent, and comparable information regarding their impact on climate change and vice-versa. This will enable companies and their investors to always include climate issues in making investment and business decisions, leading to a more responsible and efficient allocation of funds toward a sustainable and low-carbon economy.

The TCFD consulted with financial leaders and corporations around the world for 18 months to come up with its recommendations. These included investors, insurers, and banks, among others.

The core elements of the TCFD include metrics to assess climate-related risks and opportunities and targets on how to manage these. Field inspections are necessary to identify, for instance, the current use of high emission technology that can be substituted with new green technology. These inspections can also discover unsuccessful investments in new technologies so that these can be immediately addressed.

The second level of disclosure recommended by the TFCD is risk management. The company must identify and assess climate-related risks and disclose how it manages these. Third is strategy. The company discloses its strategy and financial planning regarding actual and potential climate-related risks and opportunities. Finally, the company must disclose its governance on climate-related risks and opportunities.

The TCFD applies to two types of industries in general. First is the financial sector consisting of banks, asset owners, asset managers, and insurance companies. Second is the non-financial sector that experiences the highest climate-related risks. These are the energy sector, transportation sector, materials and building sector, forest products sector, and agriculture and food sector.

TCFD Alignment Today and Tomorrow

Global company WSP released in May this year the study, Advancing Meaningful Climate Action from TCFD Disclosures. Results show that alignment is highest in North America and Europe and lowest in Asia. The financial services and information technology (IT) sectors have the highest uptakes. The researchers expressed surprise that the renewables sector had the lowest alignment.

The study predicts that governments will make TCFD disclosures mandatory, increase the analysis of the consequences of the TCFD, and address the need for equity and justice in the recommendations. TFCD risk and opportunity disclosures will affect interest rates. Investors will demand more quantitative scenario analysis to identify physical and transition risks and opportunities. There will also be a higher demand for chief resilience officers. Whether they like it or not, companies must prepare to be more transparent for the common good.

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