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Disclosing the financial impacts of climate change

Shari Littan  GAAP Report Editor, Thomson Reuters

Shari Littan  GAAP Report Editor, Thomson Reuters

The Climate Disclosure Standards Board speaks to the recommendations of the Task Force on Climate-Related Financial Disclosure (TCFD).

Over the last decade, multiple organizations have released frameworks and standards that call for increased corporate disclosure regarding efforts to curb greenhouse gas emissions and and the effects of climate change. Responding to concerns that ignoring the effects of climate change may have serious, detrimental effects on investment decision making and the financial markets as a whole, the Financial Stability Board created the Task Force for Climate Related Financial Disclosure (TCFD). In 2018, the TCFD issued a set of recommendations, which, unlike other frameworks, concludes that reporting entities must disclose the effects of climate change in their mainstream financial reports. The Climate Disclosure Standards Board (CDSB) is helping lead the effort toward education and implementation.

Shari Littan, Editor-author of Thomson Reuters’ GAAP Reporter on Checkpoint, posed a series of questions to Mardi McBrien, Managing Director of the CDSB, to help users understand these emerging demands for information.

Q: There are multiple organizations that are addressing corporate accounting and disclosure related to climate change and sustainability issues. Would you explain the work of the Climate Disclosures Standards Board (CDSB) and how it differs from some of these other organizations?

CDSB focuses on a specific stage of reporting, the integration of material climate change-related and environmental information into the mainstream annual reports of companies. Our aim is to enable better decision-making by investors and thus enhancing the efficient allocation of capital.

There are quite a few organizations that focus on sustainability reporting and we are very conscious of that. In fact, everything we do is governed by the recognition that we are just one element of the system.

Other organizations such as CDP, formerly the Carbon Disclosure Project, and the Sustainability Reporting Standards Board (SASB) provide a means to identify what information should be reported. We focus on helping businesses identify how this information should be integrated in the context of an annual report. Information in this document must be material, connected to the financial information contained in this document and prepared to a very high standard. We do this by offering companies the CDSB Framework.

I’m happy to say that close to 400 of the world’s largest companies have found our work useful and the CDSB Framework is used by several of the Coca-Cola businesses and even NASA in its climate risk management plan.

Q: The CDSB has been working closely with the Task Force for Climate Related Financial Disclosure. Would you briefly describe what the Task Force is, its mission?

The Task Force on Climate-related Financial Disclosures, or TCFD, is a group of market representatives convened by the G20 Financial Stability Board to address the lack of decision-useful climate change-related information in mainstream filings.

The TCFD’s recommendations focus on the financial impacts of climate-related risks and opportunities and this has brought a very different approach to this field. Whereas most of sustainability reporting focuses on the impact of the business on the environment, the TCFD comes to this issue from a financial stability perspective and focuses on the financial impacts of the environment on the business. This distinction, something that is core to our work as well, helps an analyst, an asset manager or any other actor in the investment chain, understand why they should care about this issue. There is no need to be focused on responsible investment, or to come at it from an ethical perspective. The TCFD recommendations are designed to elicit the financial impacts of climate change.

The recommendations of the Task Force focus on 4 key areas of disclosure:

  1. Metrics and Targets
  2. Risk Management
  3. Strategy
  4. Governance

They also have a focus on material forward-looking information, for example around the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.

CDSB powers the TCFD Knowledge Hub, a learning platform providing insights tools and resources to support companies in the rapid adoption of the TCFD recommendations.

Q: The TCFD recommendations seem to be gaining attention and traction among companies, investors, and even regulators. Why do you think this report is gaining attention so fast? 

In my opinion, there are three main reasons for the TCFD’s success.

First of all, the recommendations address a real issue: there is still a need for consistent, concise and comparable climate-related information in mainstream filings. We have been working on this issue for the past decade and were joined along the way by organizations like the International Integrated Reporting Council and SASB, but we need more progress in this field.

Second, the recommendations come from an authoritative source: they were commissioned by the G20’s financial stability body – you couldn’t get a more mainstream setting than that. This, combined with the-based market participant composition of the Task Force itself, means that the recommendations have been developed by the market, for the market.

Last but not least, the language of the intended disclosures speaks to the investment community. The market operates on financial figures and making the connection between climate change and financial impacts is possibly the most straightforward way to clarify what climate change means to this audience.

Q: There is some indication that the implementation of these recommendations is going to be a top priority item for the 2019 proxy season. What are your observations?

We see the same trend. The TCFD has become a buzzword, and rightly so, in the ESG field. It signifies better governance and risk management, climate resilient business models and rigorous transparency. This has resonated with everyone from Larry Fink from Blackrock to Shu Gu, the President of ICBC. We see a growing trend of shareholders asking the companies they have invested in to disclose in line with the TCFD recommendations and we see more and more companies beginning to do so in response. This is especially true in the oil & gas and automotive sectors where climate risk may have some of its earliest financial impacts become a reality.

We also see the beginnings of government intervention to protect investors from the financial risks of climate change. Just the other day, the state of New York has filed a lawsuit against Exxon Mobil, accusing it of misleading investors about the risks that climate-change regulations pose to its business.

On a more positive note, many argue that this topic is slowly becoming part of good shareholder engagement, which will protect investors and the companies they have invested in.

Q: Implementing new disclosures take effort. It requires a company to have the right human resources, technology and tools in place. Whom within a company do you see leading this implementation effort – is it corporate responsibility teams? What role do you see for professionals in financial accounting?  Managerial accounting? Legal? 

An excellent question. We have been advocating a cross-departmental approach to reporting for quite some time and this couldn’t be truer today as we move towards TCFD-style reporting. We advise businesses to get all relevant departments involved from the beginning and devise a reporting strategy.

The finance team has a wealth of experience in ensuring that information is collected and consolidated in a rigorous manner and that there is an audit trail. There is a lot that sustainability accounting and reporting can learn from its financial counterparts. They are also key to assess the potential positive and negative financial impacts of climate and environmental matters.

Investor relations can also play a key part in sustainability reporting. At the end of the day, this is no different to any other type of investor-oriented reporting.

As with any external information, sustainability reporting must also go through legal, so it’s a good idea to get them involved from the beginning.

Finally, anything in the annual report should have board-level signoff.

Q: How can corporate governance leaders – directors, C-Suite – encourage that an organization adequately analyze its climate risks?  What processes are you observing, in practice?

Most large businesses have a sustainability committee at the board level, which is tasked with oversight of such issues. Having a dedicated corporate governance body like this helps, but these issues should be incorporated across all functions, just like any other risk or opportunity. Setting clear policies, integrating climate into enterprise risk management systems and setting incentives through remuneration are all useful tools to support management of such risks.

Q: What is the role of investors? Are they demanding more disclosure of the effects of climate change? 

The investors we talk to tell us that they are having a tough time with the quality and quantity of information available to them. For example, to analyze the climate risk exposure of your portfolio, you need comparable and reliable information about your entire portfolio. This is not yet the case.

The biggest push for climate change-related information by investors is focused on high-emitting sectors, such as the extractive industries or the automotive sector, whose business models rely heavily on fossil fuels.

Q:  Many corporate responsibility teams report that the information that is uncovered by the process of gathering, summarizing, and reporting on climate effects and risk, as well as other sustainability issues, is valuable for risk management, innovation, and strategy.  How can stakeholders make sure that the exercise is not merely a compliance question but also a way to utilize valuable information?

As a reporting organization, you might be surprised to hear from us that reporting for the sake of reporting is pointless. A company must focus its efforts in innovating its business model, managing its risks and implementing a strategy to transition to a low-carbon company.

Reporting can be part of the bedrock upon which this transition is built. Information is a tool to track progress and identify areas for improvement and should get the financing needed to implement change. We therefore advise companies to plan ahead and develop a reporting strategy that supports their processes. A reporting strategy must be built on the needs of the business and, by proxy, the needs of its investors and other stakeholders. Then it’s time to implement, see what works, see what doesn’t work and adapt accordingly. This is an iterative process and it’s important to stay nimble.

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