Government task forces suffer from a bad reputation. Stuffed with members who have big titles but little appetite for hard work, such groups often are formed to bury an issue, not promote it.

But the Task Force on Climate-Related Financial Disclosures (TCFD) is an exception. Its report, issued in late June, is substantive and serious. It will have a significant impact in boardrooms and investment committees.

The TCFD’s recommendations will have five main effects, in our view:

1. Climate issues will get more attention in the boardroom. The report recommends companies not only disclose their climate exposures but also describe the board’s role in oversight and risk management. Boards will spend more time on these issues, and for some it will be a steep learning curve. Fortunately, the TCFD embraces the concept of materiality, a standard boards are accustomed to and which provides a useable framework for disclosing climate-related information.

2. Companies will start to say more about climate risk. The release of such a substantive and detailed report will make it hard for companies to maintain the status quo. It’s likely the quantity and quality of the climate-related information companies disclose will grow, and more ambitious firms will start to disclose the results of their scenario-modeling exercise.

3. Disclosures about climate-related risks will move into financial statements. Not only will companies be saying more about their climate risks, they’ll be saying it in their financial reports. This will be a big change from current practice, in which climate data are presented in standalone sustainability reports, regulatory databases or third-party data repositories.

4. The discussion about risk will broaden. Today, company financial reports mention climate change in the context of regulatory risk. The TCFD embraces a broader view of climate risk, encouraging companies to discuss how climate change could affect physical operations, the cost of materials and customer behavior – whatever risks meet the materiality standard.

5. Climate disclosures will become more quantitative. Most companies today, especially in the US, discuss their actions on climate change in qualitative terms, but quantitative measures will play a greater role in the future. The use of scenario analysis will help companies get specific about the possible financial impact of climate change.

Although the TCFD carries the authority of global finance ministers and central bankers, it has no way to compel companies and financial firms to improve their climate-risk disclosure. So it will be up to influential market participants to bring it about.

Big investors will play a critical role in this process, and there is evidence that climate risk is becoming part of their analysis. BlackRock, one of the world’s largest asset managers, named climate disclosure as one of its engagement priorities for the coming year, ensuring that it will be a focus in many corporate boardrooms.

To manage the increased scrutiny from investors, companies should start preparing now:

  • Convene a climate risk disclosure working group to begin to pull together expertise and resources from across the company.
  • Collect data on the climate impact of operations and engage an external advisor to assist with the methodology and process if needed. Climate data should be collected and prepared at the same time and with the same rigor as financial data.
  • Assess communication channels for disseminating information on climate risk. Websites, investor presentations and online materials may need to be expanded and upgraded.
  • Develop a “straw man” draft of climate disclosure, working closely with experts in financial communication and plain-English disclosure. This process will help speed the production of a final report once climate-risk data are analyzed for materiality.

The momentum created by the TCFD report is driving greater disclosure of climate risks and opportunities, and companies should take steps now to prepare for them.

Clear communication will be vital to a successful discussion of climate-related risks. Companies that can explain their risk exposures and present information in a clear, easily accessible form will win credibility with investors and other stakeholders.

There’s no one-size-fits-all solution for climate disclosure, and practices will evolve over time. Some companies will be early adopters and lead the way in shaping best practices, while others will follow their peer-group mean. But investors will come to expect every company – financial and non-financial – to say something about their material exposure to climate change.

Want to learn more? Access the complete version of this paper here.

 

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