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G20 Must Report Climate-Related Risks, Task Force Recommends

Dawn Ellner/flickr
Dawn Ellner/flickr

Companies in G20 countries should be required to disclose climate-related risks in their public financial filings, the Task Force on Climate-Related Financial Disclosures recommends in a report issued earlier this week.

With the announcement Wednesday, the TCFD opened a 60-day comment period on a process to make climate risk more visible to investors.

The Task Force believes climate-related risks are material risks for many organizations, and this framework should be useful to organizations in complying more effectively with existing disclosure obligations,” states the report to Financial Stability Board Chair Mark Carney.

What gets measured better gets managed better,” added TCFD chair and ex-New York City Mayor Michael Bloomberg, in his cover letter to Carney. “Widespread adoption of the recommendations will help ensure that climate-related financial issues are routinely considered in business and investment decisions and encourage an effective dialogue between companies and banks, insurers and investors. That will lead to smarter, more efficient allocation of capital, and speed the transition to a low-carbon economy.

The Task Force report sets out a disclosure framework that spans four areas: governance, strategy, risk management, and metrics and targets.

One of the essential functions of financial markets is to price risk to support informed, efficient capital-allocation decisions,” the report states. “One of the most significant, and perhaps most misunderstood, risks that organizations face today relates to climate change.” Even though the climate challenge itself is widely accepted, “many organizations incorrectly perceive the implications of climate change to be long-term and, therefore, not necessarily relevant to decisions made today.

But momentum from the Paris Agreement opens up much more immediate questions for investors. “The reduction in greenhouse gas emissions implies movement away from fossil fuel energy and related physical assets,” the Task Force notes. “This, coupled with rapidly declining costs and increased deployment of clean and energy-efficient technologies, could have significant, near-term financial implications for organizations dependent on extracting, producing, and using coal, oil, and natural gas.

More broadly, “climate-related risks and the expected transition to a lower-carbon economy affect most economic sectors and industries. While changes associated with a transition to a lower-carbon economy present significant risks, they also create significant opportunities for a broad range of organizations focused on climate change mitigation and adaptation solutions.

In a Globe and Mail commentary on the report, Task Force member Stephanie Leaist, head of sustainable investing at the Canada Pension Plan Investment Board, urges Canadian companies and investors to be early adopters in implementing the recommendations.

As investors, our job is to draw from current information sources to look into the future,” she writes. “Not knowing all the answers shouldn’t stop us from making plans based on the information at hand. The more detailed and relevant the information, the better investors can look forward, assess risks and opportunities, and allocate capital accordingly.

Leaist noted that the CPPIB, which has not been shy about its fossil fuel investments to date, created an internal climate change working group this year “to develop a better system for assessing climate-related risks and opportunities across our investment strategies and consider the long-term energy transition under way. This is foundational work to position CPPIB’s portfolio in light of both the short- and long-term climate-related risks and opportunities.