Climate Related Financial Disclosures – The Way Forward?

Read­ing time: 4 mins

Mem­ber of the Cli­mate Change Work­ing Group, Wayne Kenafacke dis­cuss­es the recent rec­om­men­da­tions report from the G20’s Finan­cial Sta­bil­i­ty Board’s Task Force on Cli­mate-relat­ed Finan­cial Dis­clo­sures.

Cli­mate change can no longer be thought of as a “future issue” by Aus­tralian Finan­cial Insti­tu­tions. Not after APRA Exec­u­tive Board Mem­ber Geoff Sum­mer­hayes’ speech to the Insur­ance Coun­cil of Australia’s Annu­al Forum on 17 Feb­ru­ary.  Mr Sum­mer­hayes used this speech to make clear that APRA views cli­mate change as a cur­rent issue, because the tran­si­tion risks aris­ing from pol­i­cy, legal and busi­ness changes nec­es­sary in order to meet com­mit­ments under the Paris Cli­mate Agree­ment are already being expe­ri­enced. 

Tran­si­tion risks are par­tic­u­lar­ly rel­e­vant. First­ly, in order to mit­i­gate future phys­i­cal and direct risks of cli­mate change (e.g. ris­ing sea lev­els), gov­ern­ments are com­mit­ting to tak­ing action and fac­ing the con­se­quent tran­si­tion risks now and in the short-term. Sec­ond­ly, you don’t even need to trust the cli­mate sci­ence to acknowl­edge cli­mate change tran­si­tion risks, as these tran­si­tion risks arise from society’s response to cli­mate change, so even cli­mate change skep­tics fear their impact. Any effort to meet the com­mit­ments under the Paris Cli­mate Agree­ment or sim­i­lar car­bon reduc­tion tar­gets, cre­ates tran­si­tion risks asso­ci­at­ed with those actions.

What Should Organisations Do?

We’ve all heard the phrase “What gets mea­sured gets man­aged” and iden­ti­fi­ca­tion, mea­sure­ment and mon­i­tor­ing of risks are key parts of any risk man­age­ment frame­work.  So how should an organ­i­sa­tion mea­sure and man­age its expo­sure to cli­mate change risks?  A key and recent devel­op­ment is the release by the G20’s Finan­cial Sta­bil­i­ty Board of the Rec­om­men­da­tions of the Task Force on Cli­mate-relat­ed Finan­cial Dis­clo­sures (FSB TCFD).

The aim of the report is to pro­vide a “clear, effi­cient, and vol­un­tary dis­clo­sure frame­work that improves both the ease of pro­duc­ing and using cli­mate-relat­ed finan­cial dis­clo­sures.”[1]  Devel­op­ing a frame­work for exter­nal dis­clo­sure reflects the impor­tance of man­ag­ing the busi­ness impli­ca­tions of cli­mate change to exter­nal par­ties such as investors, cred­i­tors and reg­u­la­tors.  The frame­work is intend­ed to apply to any organ­i­sa­tion in any coun­try and any indus­try, vol­un­tar­i­ly as part of finan­cial fil­ings and dis­clo­sures.  It con­sists of both gener­ic guid­ance and detailed guid­ance for organ­i­sa­tions in spe­cif­ic indus­tries like­ly to be most impact­ed by cli­mate change, includ­ing insur­ers, banks and asset man­agers.  While ini­tial­ly the dis­clo­sures are like­ly to be most­ly qual­i­ta­tive in nature, the FSB TCFD intends to include more quan­ti­ta­tive mea­sures over time. 

Ini­tial­ly the report out­lines a frame­work for iden­ti­fy­ing cli­mate relat­ed risks and oppor­tu­ni­ties, as illus­trat­ed in fig­ures one and two.

Fig­ure one – Cat­e­gories of Cli­mate Oppor­tu­ni­ty and Cli­mate Risk

Cred­it: FSB TCFD

Fig­ure two – Exam­ples of Cli­mate Oppor­tu­ni­ty and Cli­mate Risk

Cred­it: FSB TCFD

 

After using this frame­work to iden­ti­fy the cli­mate relat­ed risks and oppor­tu­ni­ties spe­cif­ic to an organ­i­sa­tion, the report rec­om­mends spe­cif­ic dis­clo­sures grouped into cat­e­gories relat­ing to gov­er­nance, strat­e­gy, risk man­age­ment and met­rics and tar­gets, as illus­trat­ed in Fig­ure three.

Fig­ure three – Exam­ples of Cli­mate Oppor­tu­ni­ty and Cli­mate Risk

Cred­it: FSB TCFD

The seg­ment­ing of dis­clo­sures across these cat­e­gories should pro­vide users with insight into how an organ­i­sa­tion is con­sid­er­ing and approach­ing cli­mate relat­ed issues, in addi­tion to pro­vid­ing an esti­mate of the organisation’s actu­al expo­sure.  Fig­ure four pro­vides an exam­ple of the detail sup­port­ing a rec­om­mend­ed strat­e­gy dis­clo­sure, includ­ing both the gener­ic guid­ance and sup­ple­men­tal guid­ance for insur­ance com­pa­nies.

Fig­ure four – Exam­ples of Rec­om­mend­ed Dis­clo­sure for the impact on the Organisations’s busi­ness­es, strat­e­gy and finan­cial plan­ning, includ­ing Sup­ple­men­tal Guid­ance for Insur­ers

Cred­it: FSB TCFD

Giv­en the vast­ly uncer­tain range of poten­tial out­comes, the report empha­sis­es the impor­tance of sce­nario analy­sis as a tool to assist organ­i­sa­tions to con­sid­er cli­mate risks and oppor­tu­ni­ties (see Fig­ure five). 

Fig­ure five – FSB TCFD’s illus­tra­tion on the impor­tance of sce­nario analy­sis

Cred­it: FSB TCFD

IAA Submission in Response

The Inter­na­tion­al Actu­ar­i­al Asso­ci­a­tion (IAA)’s sub­mis­sion to the FSB TFCD was sup­port­ive of the pro­pos­als, recog­nis­ing “that for­ward look­ing infor­ma­tion giv­en in the con­text of finan­cial report­ing require­ments will great­ly facil­i­tate informed invest­ment / cap­i­tal allo­ca­tion / under­writ­ing deci­sion mak­ing. The process of pro­duc­ing that infor­ma­tion should itself be of sig­nif­i­cant ben­e­fit to an enti­ty in address­ing cli­mate and envi­ron­men­tal risks.” 

The IAA sup­port­ed the inten­tion to include more quan­ti­ta­tive mea­sures over time and pro­posed a detailed review of the stan­dards every three years, with a focus on the bal­ance of quan­ti­ta­tive vs qual­i­ta­tive dis­clo­sures.  The IAA also sug­gest­ed that the use of mul­ti­ple stan­dard­ised sce­nar­ios in dis­clo­sures may be more infor­ma­tive than the use of a sin­gle sce­nario and also not­ed the poten­tial for impacts to be asym­met­ric (e.g. around tip­ping points like whether or not per­mafrosts thaw) and sug­gest­ed the use of sce­nar­ios that are both more opti­mistic and more pes­simistic than a two degree C sce­nario. A final stan­dard is sched­uled to be released in June this year.

Conclusions

The use of cli­mate relat­ed finan­cial dis­clo­sures could be a key ele­ment in help­ing organ­i­sa­tions to under­stand, pri­ori­tise and mon­i­tor their response to both the phys­i­cal and tran­si­tion risks aris­ing from cli­mate change.  Accord­ing­ly, the devel­op­ment of a stan­dard­ised frame­work and guid­ance for such dis­clo­sures, is to be applaud­ed.  Intend­ed to allow broad adop­tion and also to allow the dis­clo­sures to evolve over time, the guid­ance may lack the lev­el of detail that is nec­es­sary to ensure com­pa­ra­bil­i­ty and con­sis­tent appli­ca­tion.  Giv­en this need to pro­vide suf­fi­cient guid­ance while also allow­ing the dis­clo­sures to evolve, the IAA pro­pos­al for a detailed review of the stan­dards every three years is par­tic­u­lar­ly help­ful. 

Prob­a­bly the great­est ben­e­fit to many organ­i­sa­tions from adopt­ing the dis­clo­sures would be the val­ue of the insights gained by apply­ing the frame­work illus­trat­ed in fig­ures one and two.  In doing so, organ­i­sa­tions can read­i­ly gain an under­stand­ing of the unique risks and oppor­tu­ni­ties fac­ing that organ­i­sa­tion aris­ing from cli­mate change.

The Institute’s Cli­mate Change Work­ing Group will con­tin­ue to mon­i­tor the devel­op­ment of the FSB TCFD stan­dards. 

 

 

[1] https://www.fsb-tcfd.org/wp-content/uploads/2016/12/TCFD-Report-Overview-Dec.-2016.pdf

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About the author

Wayne Kenafacke

Wayne is an experienced and commercially focused financial services executive and in recent years has held executive roles as a CFO, GM Products and Chief Actuary. His experience spans many segments including life insurance, superannuation, financial advice, general insurance and retail banking. He is a member of the Institute’s Climate Change Working Group.

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