The G20 is due to meet in Hamburg, Germany, in July and climate change is one of the key topics on the agenda. It will affect corporates because discussions will include setting guidelines for companies to disclose climate-change related risk.
The Financial Stability Board (FSB), composed of central banks, finance ministries and financial regulatory authorities, is due to present a report at the G20, reviewing how the financial sector accounts for climate-related issues and making recommendations on how organisations should report to their national financial regulators. The final report, a draft of which was published at the end of last year, is expected to recommend that all entities with public debt or equity make disclosures about their climate-related financial risk in their mandatory regulatory filings using a standard framework.
A report by IHS Markit finds that the FSB approach is a radical departure from the concept of 'materiality' in financial reporting, in which managers use their judgement to provide information needed by investors. However, climate-related risks, under the FSB recommendations, will be given separate treatment using a universal disclosure framework, rather than relying on managerial judgement of 'materiality'.
Daniel Yergin, vice chairman of IHS Markit, writes: “In so doing, it sets aside managerial judgment and promotes those risks to automatic materiality status. It risks politicizing financial disclosure by directing it to specific topics rather than material information. This directly conflicts with the established principles that management and boards must decide what information is material.”
The bottom line seems to be that climate-related risks are far more complex and nuanced than the FX risks or counterparty risks that companies are used to measuring and reporting. And the problem is that financial statements, as they currently stand, aren't designed to assess “such complex unknowns”, as Yergin calls it. He adds: “The Task Force recommends the use of scenarios and metrics in their draft report. But this would be a misuse of such tools, transforming uncertainties about the future into 'certainties'. This will have the effect of distorting markets rather than improving them.”
CTMfile take: Reporting on climate-related risks could change as a result of the FSB recommendations, but as Yergin points out, reporting on such complex risks according to a universal disclosure framework doesn't mean that investors will be protected from those risks. He points out that thoughtful strategies will be needed to guide companies through the future uncertainty.