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FSB taskforce proposes ‘ambitious but practical’ climate disclosures

The Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD) today announced what it says are “ambitious but also practical” recommendations for reporting by organisations – companies and investors – on financial aspects of climate change, although the “bite” of the voluntary disclosures has been questioned.

Established in December 2015, the industry-led task force today officially announced its full set of recommendations for information that financial and non-financial “organisations” should disclose to improve understanding of the potential financial implications of climate change and the transition to a “lower-carbon” economy.

A consultation on the draft recommendations runs until 12 February.

The recommended disclosures are intended to “elicit decision-useful, forward-looking information” on climate-related financial impacts to help “investors, lenders and insurance underwriters to appropriately assess and price climate-related risks and opportunities”.

As already foreshadowed, the task force has made recommendations for disclosure structured around four thematic areas: governance, strategy, risk management and metrics and targets.

The four overarching recommendations are supported by more specific recommended disclosures that build out the framework, and the task force has also developed supporting guidance.

One of the key recommendations, according to the task force, is that organisations conduct forward-looking scenario analysis to assess and illustrate the potential impact on their business.

The idea is that the recommended disclosures can be adopted by companies of all types and should be included in mainstream financial filings.  

It referred to its recommendations as “a foundation” for improved reporting that “aim to be ambitious but also practical for near-term adoption”.

Reporting will evolve and mature over time, it said.

Speaking about the draft recommendations, FSB chair Mark Carney said: “The disclosure recommendations will give financial markets the information they need to manage risks, and seize opportunities, stemming 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 that all capital-raising companies can compile.”

Many supportive comments from task force member firms and NGOs were compiled in connection with the report’s recommendation today.

Eloy Lindeijer, CIO at major Dutch pension investor PGGM, said: “Once implemented, the recommendations will greatly improve transparency and support more informed asset allocation decisions. Institutional investors need this to play a stronger role in financing the energy transition.”

Stephanie Pfeifer, chief executive at the Institutional Investors Group on Climate Change (IIGCC), said the group welcomed the TCFD’s recommendations, as they would ultimately help investors to “better assess, price and manage the risks and opportunities of transition to a sustainable, low-carbon, global economy.

“Material climate disclosures must become a routine part of annual reporting practice if institutional investors are to make robust decisions that accurately reflect physical risks posed by climate change and transition risks arising from swift adoption of clean and efficient technologies.”

Some critical points were raised, too, however, with Mark Wilson, chief executive at Aviva, suggesting that the disclosure will lack “real bite” by being voluntary.

“I am calling to go one step further,” he said. “We should give the disclosure real bite by making these recommendations mandatory, not voluntary. Only then will climate risk become integral to corporate governance and how we all do business.”

Speaking at the IPE conference in Berlin earlier this month, Russell Picot, special adviser to the taskforce, said there was merit in “allow[ing] the marketplace to experiment first” before hard-coding requirements. 

Developing disclosures that are voluntary was in the task force’s mandate from the FSB from the very beginning.

Law firm ClientEarth, meanwhile, warned that regulators and companies may use the TCFD recommendations on climate risk disclosure to avoid compliance with, and enforcement of, existing laws.

Senior lawyer Alice Garton said: “These recommendations should set the standard for compliance with these existing laws. It shouldn’t be an ‘either/or’ choice, but there’s a very real danger some companies and regulators will treat it as such.”

The task force arguably appears to pre-empt this point.

In its report, it said companies in most G20 jurisdictions were already required to disclose material risks in their financial filings and that the recommended reporting framework “should be useful to organisations in complying more effectively with existing disclosure obligations”.

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