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Climate-related risks must be clear to investors

A report from CDP, which operates a unique global climate disclosure platform for more than 6,000 companies on behalf of more than 800 institutional investors, highlights how climate and environmental-related threats are exposing businesses to new and unpredictable strategic and operational risks. It says that these can often be “catastrophic in nature and interfere with an organization’s ability to do business”.

Pushing agenda for climate-related financial disclosures

The report – Reporting climate resilience: the challenges ahead – marks the first anniversary of the launch of the Task Force on Climate- related Financial Disclosures (TCFD or Task Force), set up last year by the Financial Stability Board (FSB) and backed by Mark Carney and Michael Bloomberg. The TCFD is pushing climate change more squarely on the agendas of corporate boards and C-suites and has published recommendations on climate-related financial disclosures.

CDP's report also looks at the challenges of weaving climate disclosures into corporate DNA and financial reporting. In the report's introduction, it highlights the need for stakeholders – or corporate investors – to have greater clarity on the impacts of climate- related events and trends on organizations. It points out, however, that in a recent CDP report (Ready or not: Are companies prepared for the TCFD recommendations?) it emerged that only 28 per cent and 38 per cent of respondent companies have considered at least one regulatory (transition) risk and one physical risk, respectively, beyond six years. Other research indicates that only 16 per cent of S&P Global 1200 companies are disclosing the risks that climate change poses to their businesses. CDP's report states: “The key challenge moving forward is to convey this information in a consistent format that is material and understandable to investors and other decision makers.”

Some of the key takeaways from the report include:

  • The growing focus on climate resilience is driven by the view that companies that assess and understand climate-related risks and opportunities will be able to make better decisions for their future business.
  • Companies in all sectors, including the financial-services industry, are being asked: What are the implications of climate-change risks and opportunities for your organization’s financial performance?
  • The release of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations in June 2017 has accelerated this focus by providing a framework for disclosures on the financial impacts of physical and transition climate- related risks.
  • One year from the release, there is accelerating support for the TCFD recommendation from policy makers, investor groups, NGOs, and companies.
  • Yet there are significant gaps between the focus of current climate reporting by most companies and the information that must be synthesized to meet the TCFD recommendations.
  • Adoption of the recommendations requires companies to reconsider and examine how they report on climate risk. Many organizations are still struggling to determine the right starting point.
  • Top three challenges for companies in adopting TCFD recommendations:
    • Ensuring leadership support for enhanced disclosure
    • Revising risk assessment processes
    • Applying scenario analysis to climate change
  • There are clear indications that implementation will take place over time, but there is still much peer learning to be done on how to apply and report against the TCFD recommendations.  

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