Recommendations from influential task force call for renewed effort to tackle market failure through improved disclosure of the climate-related risks all firms face
Business around the world can expect to face fresh pressure to provide more detailed information on the climate-related risks they face and how they are planning to prosper in a low carbon economy, following the publication of a major new set of recommendations on how corporate climate risks should be disclosed.
The Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (FSB TCFD) has today released long-awaited proposals detailing how firms should voluntarily disclose climate-related information as part of their mainstream financial filings.
The task force was launched last December by Bank of England governor Mark Carney in his role as head of the Financial Stability Board (FSB). He appointed former New York Mayor Michael Bloomberg to chair the group of influential figures from across the financial sector.
The recommendations, issued today for public consultation, aim to help organisations identify and disclose information required by investors, lenders and insurance underwriters to assess and price climate-related risks and opportunities. They were formed after a year-long consultation across multiple regions and around the world and represent the first global, industry-led effort to create recommendations for climate-related financial disclosures.
The recommendations are designed to be adoptable by firms of all types and across sectors and jurisdictions and aim to elicit decision-useful, forward-looking information on climate-related financial impacts, the group said.
Specifically, they call on firms to describe the potential impact of a range of different climate-related scenarios on their business, such as global temperature increases of 2C or more or steep emissions reductions and the rapid emergence of alternative clean technologies, as planned under the international Paris Agreement. The aim is to demonstrate to investors how a firm’s strategy and financial planning could be impacted by a range of plausible scenarios, and to increase management and investor focus on the risks and opportunities arising from the transition to a lower-carbon economy.
The task force said the recommendations lay a foundation for immediate adoption, promote board and senior management engagement on climate-related issues, and are flexible enough to evolve as climate-related disclosure practices mature.
They also said they were “adoptable by companies of all types, across sectors and jurisdictions; designed for inclusion in mainstream financial filings; [and would] elicit decision-useful, forward-looking information on climate-related financial impacts”.
Carney said the disclosure recommendations will give financial markets “the information they need” to both manage the risks and seize the opportunities which stem from climate change.
“As a private sector solution to a market issue, the Task Force has focused on the practical, material disclosures investors want and which all capital-raising companies can compile,” he said in a statement.
Bloomberg said the report represents an “important effort” by the private sector to improve transparency around climate-related financial risks and opportunities.
“Climate change is not only an environmental problem, but a business one as well,” he said in a statement. “We need business leaders to join us to help spread these recommendations across their industries in order to help make markets more efficient and economies more stable, resilient, and sustainable.”
Writing jointly in The Guardian today, Carney and Bloomberg said citizens, consumers, businesses, governments, and international organisations were all taking action in response to extreme weather events and other climate-related risks, but investors currently do not have the detailed information they need to respond to these risks.
“This must change if financial markets are going to do what they do best: allocate capital to manage risks and seize new opportunities,” they wrote. “Without the necessary information, market adjustments to climate change will be incomplete, late and potentially destabilising.”
They added that a new approach was urgently needed to correct an existing market failure. “We believe that financial disclosure is essential to a market-based solution to climate change,” they wrote. “A properly functioning market will price in the risks associated with climate change and reward firms that mitigate them. As its impact becomes more commonplace and public policy responses more active, climate change has become a material risk that isn’t properly disclosed.”
Speaking ahead of the launch of the recommendations, Julian Poulter, chief executive of the Asset Owners Disclosure Project, said the guidelines mark an “important milestone” and may prove to be as influential as the Paris Agreement climate deal.
Mark Campanale, founder and executive director of the Carbon Tracker Initiative, which popularised the carbon bubble hypothesis, added that the proposals highlighted how firms and investors now had a clear fiduciary duty to disclose climate risks. “With a climate trifecta of physical risks, stranded assets, and the threat of legal liability – fiduciaries are now on notice to implement measures to protect their portfolios,” he said.
A number of experts from across the financial sector have privately warned that unless firms and investors embrace the task force’s voluntary recommendations they risk governments stepping in with more demanding mandated reporting requirements, as they work to deliver on their Paris Agreement commitments.