Climate-Related Financial Disclosure: From the Sustainability Department to the Desk of the CFO

In June 2017, the Task Force on Climate-Related Financial Disclosures (TCFD) released its final report with recommendations that will have an increasing impact on all organizations (both financial and non-financial). Most importantly, two necessary organizational changes were brought to light: bringing together both experts on climate-related issues and financial executives to report risks consistently and introducing scenario analysis as a tool for creating robust and agile strategies. CFOs should develop a holistic understanding of how climate change affects their business to satisfy investors.

Climate-Related Financial Disclosure Going Mainstream

The TCFD expects that the practice of climate-related financial disclosure (e.g., disclosing greenhouse gas emissions, abatement strategies, and opportunities) will scale up significantly over the next 5 years, driven by demands of various stakeholders. This has already been happening in the market. Several large asset managers (including Blackrock, Aviva, Axa, and Legal & General) have issued statements promising action if companies do not disclose in line with TCFD recommendations. Some companies have already experienced pressure from these asset managers (e.g., Exxon). Additionally, CDP announced that TCFD recommendations will be implemented in its disclosure platform.

How to Disclose Climate-Related Information

The TCFD developed several recommendations relevant for all organizations about where and what to disclose. As the TCFD believes climate-related issues are material for many organizations, it recommends organizations disclose within annual financial reporting. That ensures appropriate controls govern the disclosure process. The following figure summarizes the recommendations.

(Source: Ecofys, a Guidehouse Company)

Practical Guidance for Disclosing Organizations

Besides the generic recommendations above, the TCFD also offers specific and concrete guidance for companies. For example, organizations should consider including in their disclosure of governance a description of processes by which management is informed about climate-related issues. Another example is that when disclosing emissions targets, organizations should consider including whether their target is absolute or intensity based and which key performance indicators are used to assess progress. All organizations are encouraged to employ scenario analysis to test strategies under different policy, technology, and macroeconomic developments. Additionally, supplemental guidance is presented for financial and non-financial sectors.

Key Changes Compared to the December 2016 Report

The TCFD published its preliminary findings in December 2016, after which it entered an extensive consultation process. A key change for financial sectors is that the weighted average of carbon intensity is now the recommended metric for asset owners and managers. A key change for non-financial sectors is the $1 billion threshold for robust scenario analysis.

Recommendations

Companies that want to successfully disclose climate-related financial information should focus on two things: 

1. Integrate climate-related information into broader risk management processes: To successfully disclose climate-related financial information, it is essential to connect climate experts with financial executives since climate-related risks and opportunities need to be integrated in mainstream risk management. Climate-related financial information should be audited and signed by the CFO when it is included in mainstream financial filings.
2. Employ scenario analysis to get insights into climate-related developments: Companies should realize that continuous testing of strategies against developments (e.g., policy, technology, and macroeconomy) is required. Scenario analysis is a valuable strategic tool for navigating an uncertain future, and it should be used to test the robustness of strategies. Such analysis requires unique capabilities that may need to be developed. After conducting scenario analysis, insights should feed into the company's strategic framework.

The TCFD’s recommendations emphasize the arrival of climate strategies in the boardroom. Implemented effectively, these offer a great opportunity to truly integrate climate concerns into an organization’s operations and future-proof strategy.