In December last year the Financial Stability Board (FSB) established a Task Force on Climate-related Financial Disclosures (TCFD). When you visit the TCFD’s webpage, the first thing you see is a quote from Michael Bloomberg which says the work of the TCFD will “help to accelerate global investments in technological innovation and clean energy”. The TCFD aims to do this by recommending how corporates and financial institutions should disclose information about climate-related risks and opportunities. The first phase of its work – setting their scope and objectives – was subject to a one month public consultation that is now complete. What emerges from the responses submitted will, we hope, help inform the TCFD’s recommendations and guidelines – due to be published in February 2017.
What should the Task Force recommend?
Better disclosures can help achieve Bloomberg’s stated aim in three important ways. Disclosures can encourage sustainable business practices – most importantly in companies highly exposed to risks from the low carbon transition. They can inform policymakers – reliable data on the extent of capital reorientation from high to low-carbon uses is a bellwether for progress against our climate goals. And, finally, they can enable informed investor stewardship – better data can help asset owners hold companies to account and ensure climate-related risks are properly priced.
Encourage sustainable business
To encourage sustainable business practices, the Task Force must focus on risks that arise from the transition to a low carbon economy. They should pose existential questions to companies about their viability in a global economy that delivered a landmark climate agreement in Paris last year, and aims to maintain global temperature increases to well below 2°C. Such questions should include how compatible is your business model in a world transitioning to 2°C? If it’s not compatible, how will you manage change? How much have you invested already to prepare for these outcomes? At the least, publicly disclosed answers to these questions will shine a light on the risks (and opportunities) companies face from the transition. At best, they will empower the sustainability professionals in these companies, create board level conversations and drive meaningful change. There’s good reason to be optimistic – business leaders in the UK recently praised the introduction of mandatory carbon reporting for improving their resource efficiency through exactly this route.
Enhanced disclosures can also help policymakers track progress against climate finance goals and inform future policy development. The TCFD should recommend disclosures that help answer the question set out in Article 2 of the Paris Agreement: are financial flows consistent with a pathway towards low greenhouse gas emissions? Currently, at both a national and international level, policymakers do not have the requisite data to understand if current finance flows are consistent with their climate goals. Given that the investments made today shape our economies for decades to come, answering this question in a timely fashion will be important to spur proactive policy actions and get low carbon investment back on track.
Enable informed investor stewardship
Disclosures can help investors act as effective responsible stewards of capital in two ways. First, they can help financial institutions identify and manage their exposures to climate-related risks – which will move money to more climate friendly uses. And second, they can facilitate meaningful engagement between companies and their investors about how business practices can be realigned with climate change goals.
Doing so is important – the value at risk from climate change is huge and, while estimates are unavoidably uncertain, a number ending in trillions is probably the right ball park. For example, The Economist reckons the average loss will be about the same as Japan’s GDP – $4.2trillion in today’s money – climbing sharply if warming increases to 5°C or more.
Information that could help investors understand these risks, but is currently unavailable, includes a comprehensive and verified database of at risk assets. This database should include the asset’s location, technologies and owner. If this was instituted in a public body, as some have called for – assessments of asset stranding risk would be quicker, cheaper and more accurate. Financial markets would become more efficient as a result.
Know thy limits
The work the TCFD is doing on climate-related risks will, at the least, raise the profile of this important discussion and at best will realise Bloomberg’s goal. But better disclosures are far from a panacea and they’re a complement, not a substitute, to actions elsewhere. Policymakers still have the important role of making transition risks look more likely. If they’re successful market participants will take these risks more seriously and money will be shifted to the places its needed most as a result.