To be truly effective, the TCFD's voluntary recommendations need widespread adoption, and regulators may need to get involved.
The final set of recommendations are not perfect – issues E3G previously raised publicly and in its consultation response in February have not been fully addressed. For example, physical risks are still downplayed and the framework is still unlikely to elicit disclosure of exposure to major political risks from the climate transition.
Nevertheless, credit should be given to the TCFD for taking such a positive step forward – the integration of climate change information into mainstream financial filings may take place on a major scale for the first time. The TCFD recommendations have already garnered the support of over 100 business leaders. That is a substantial achievement and important for two key reasons.
First, widespread reporting of companies’ exposure to climate-related risk and opportunities enables financial markets to function more effectively. As Mark Carney recently wrote in the Financial Times, ‘The climate-related risks and opportunities businesses face are currently shrouded in secrecy. Having information on such risks would allow investors to back their convictions with their capital, whether they are climate optimists or pessimists, evangelicals or sceptics.’
Second, this information will be vital to support the necessary negotiation between governments, firms, investors and civil society on how to best manage the risks from climate change and balance the needs of winners and losers in transition to a low-carbon economy. Scenario analyses – to enable a forward look at the potential impact of climate change on businesses – will be important here. As E3G’s scenario-based simulation the transition of the international oil and gas companies to become ‘2°C-compatible’ indicates, disclosures hold the key to high-carbon firms being given a licence by investors to transform themselves to fit with this new world order.
This information will be crucial too for governments wishing to ensure the low-carbon transition is as orderly as possible, with large, rapid downward climate-related price adjustments avoided and new infrastructure built in a way that is climate-resilient.
To reap these benefits, widespread adoption of the Task Force’s recommendations is a necessity. This will be the real test of whether its work has been a success. Patchy and inconsistent information is nearly as useless as no information at all. Since the TCFD’s recommendations are voluntary – and their own surveys suggest that almost a third of companies surveyed are unwilling to report against the framework – a sustained effort to make climate reporting the norm and not the exception will now be required.
Efforts are already in train to achieve exactly this. The FSB has extended the lifetime of the TCFD to September 2018, during which time it will work to encourage the adoption of the recommendations and support FSB and G20 authorities in promoting the advancement of climate-related disclosures. The TCFD is not alone. Other stakeholders including stock exchanges, investment consultants and credit rating agencies can and should also play an active role in promoting these disclosures.
This approach is not without risks – widespread adoption could still elude the TCFD – suggesting that what is really needed is mandatory implementation of the recommendations. The conversation that needs to take place over the coming months is what form regulatory intervention takes.
One option would be simply clarify that existing disclosure rules do apply to climate change. In most jurisdictions disclosing material financial risks is already mandatory. For example, in the EU this is required under the Accounting Directive, and in the UK under the Companies Act. That being the case, perhaps what is needed – as some have already suggested – is clarity on the concept of materiality as it relates to climate change. Since climate change is a non-diversifiable risk many argue that it requires special attention.
Another option is to implement new legislation that explicitly requires companies to report on climate-related matters. Some jurisdictions have already moved forward on this, including California, whose insurance regulator have required insurers to disclose their exposures to climate risk and, famously, France’s Article 173 – the first ever investor climate reporting law.
I fully expect these issues will be reflected in the upcoming interim report from the European Commission’s High-Level Expert Group on Sustainable Finance. Disclosure of climate-related information formed a significant component of the Group’s discussions during the first half of the year, and will continue to debated as we formulate our final policy recommendations due by the end of this year. I hope that what will emerge is a set of ambitious proposal that the Commission can act on to ensure comprehensive implementation of the TCFD’s proposals. If that happens, the TCFD’s work will already have had a significant impact.
