Company climate risk disclosure is improving but not nearly fast enough, according to the latest update from the Task Force on Climate-related Financial Disclosures
Disclosure of threats to business from escalating climate risks is improving, but not nearly at a fast enough pace given the scale of financial risks posed by extreme weather and the low carbon transition.
That is the broad conclusion of the Financial Stability Board's (FSB) global climate risk task force, which today published its annual report assessing progress against its recommendations for climate disclosures.
The report reveals a small but steady uptick in disclosure in the two years since the Task Force on Climate-related Financial Disclosures (TCFD) published its final recommendations in June 2017 detailing how companies and investors should work to improve their understanding of the potential threats posed by climate change.
Based on an artificial intelligence review of more than 1,100 companies across 142 countries, the group found the average number of recommended disclosures per company rose 2.8 in 2016 to 3.1 in 2017 before reaching 3.6 last year, equating to a 29 per cent increase over the two year period.
At the same time, the percentage of companies that disclosed information aligned with at least one of the TCFD's recommendations grew from 70 per cent in 2016 to 78 per cent last year.
However, given the TCFD guidelines set out best practice recommendations for as many as 11 separate climate-related disclosures for companies facing material climate risks, the findings suggest progress is not happening fast enough given the scale of escalating physical, transitional and regulatory climate impacts faced by all firms.
The study follows a report yesterday by green disclosure non-profit CDP, which found more than 200 of the world's biggest companies believe they are at risk to the tune of almost $1tr due to climate change, with many of the impacts likely to hit within the next five years.
Chair of the TCFD Michael Bloomberg said he was "encouraged" by the continued growth in the number of firms adhering to the guidelines, arguing that any improvements in disclosure would mean "businesses are better informed about the risks they face, and investors are more capable of making sound decisions".
"However, we're also clear-eyed about the serious threat that climate change poses," he added. "In order to keep people out of harm's way, and build a more resilient global economy, we need more companies to follow their lead - and soon."
The TCFD guidelines have secured broad backing from the global corporate and financial community since their launch. The list of TCFD supporters now includes 374 financial and 297 non-financial companies, with a combined market capitalisation of nearly $9.3tr, the report reveals. The supporting financial firms alone are responsible for assets of nearly $118tr, and backers also include 114 trade associations, financial and insurance supervisors and regulators, governments and ministries.
As such, finance industry insiders are optimistic that investor pressure on listed companies to report in line with the TCFDs will continue to increase.
However, fears remain that too many companies are failing to engage with obvious climate risks and are yet to undertake the kind of scenrio analysis that the TCFD recommended and which is designed to help firms prepare for climate-related disruption. A growing band of investors are increasingly concerned that carbon intensive firms could quickly be left with stranded assets as competitive clean technologies emerge and public and policy pressure to decarbonise intensifies. Over the past year warnings from scientists have grown louder as school students have regularly gone out on strikes and public sentiment in support of more ambitious decarbonisation policies has increased, as evidenced at the ballot box in last month's EU elections.
There is increasing concern among key figures in the global financial sector, too. Bank of England Governor Mark Carney - who chaired the FSB until last year - warned in April that the global financial system faces an existential threat from climate change, and called for urgent reforms. In addition, more than 35 central banks and financial regulators around the world recently issued a "loud wake-up call" for financiers to take action to minimise the escalating risks posed by climate change and shift investment towards the low carbon economy.
As such, speaking to journalists yesterday, TCFD secretariat member Stacy Coleman - who is also managing director at Promontory Financial Group - said the level of company disclosure revealed by today's report "isn't quite where we think it should be, in light of increasing climate changes and the amount of information that probably needs to be out there for companies to make good capital allocation decisions".
"There still isn't a single recommended disclosure that is above 50 per cent, and so we see that as something of a goal for us to get towards in terms of getting a higher level of disclosure," she said.
However, there are some bright spots in the report. Ninety-one per cent of the 198 survey respondents that identified as 'preparers of disclosure' have decided to 'fully' or 'partially' implement the TCFD recommendations, with 67 per cent stating their companies plan to ensure complete implementation within three years. Moreover, 76 per cent of users stated they are already using climate-related financial disclosures in their decision-making processes.
But while commitments to implementing the TCFD's recommendations are encouraging, actual disclosure still faces challenges, according to the report. Many of those surveyed in the report found disclosing scenario analysis assumptions difficult as they lack standardised metrics and targets, while those using disclosure information frequently want more clarity on the financial impact of climate-related issues on companies to aid decision making.
"We found from users of disclosure that more clarity is needed on financial impact, which is sort of a parallel issue with the finding that not many companies disclose information about the resilience of their strategies," Coleman explained. "That's a linking point with financial impact, so it's not surprise that users want information but not many companies disclose that type of information yet."
The findings could fuel calls that disclosure of climate-related financial risks may need to move from a voluntary basis - as is the case with the TCFD process currently - to a mandatory requirement if investors are to be provided with the information they need to avert a climate crisis and 'carbon bubble'.
Green NGO ClientEarth, which has sought to put pressure on companies, auditors, pension funds and regulators to improve climate risk disclosure - and has made several complaints about current disclosure practices to the Financial Reporting Council in the UK - is just one of those groups which has repeatedly called for better enforcement of existing disclosure rules, and for the TCFD guidelines to be made mandatory.
Commenting on today's report, David Clarke, head of policy at non-profit Positive Money, similarly called for the TCFDs to be made mandatory. "With a small window of time to decarbonise the economy, there is an urgent need to improve the quality and consistency of corporate disclosures on climate risk," he said in a statement provided to BusinessGreen.
He pointed out that the average number of recommended disclosures was just a third of the 11 which the TCFD guidelines suggest, while nearly a quarter of large companies have made no TCFD-aligned disclosures whatsoever.
"If the current rate of progress continues, the number of disclosures per company won't reach the necessary level until 2028, which is clearly far too late," he added. "For investors and regulators to act on the risks posed by climate change, disclosures must be consistent and comprehensive. The only way to ensure blanket coverage is to move rapidly towards mandatory enforcement of the TCFD recommendations."
Given it has only been two years since the TCFD guidelines were released, it is certainly welcome that companies and investors worth trillions of dollars have thrown their weight behind greater disclosure of climate-related risks. But, as today's report makes clear, in order to reach the goals of the Paris Agreement and avoid catastrophic climate change and accompanying financial woes, financiers and companies need to take much more forceful action, and quickly.
And in any case, with the economy shifting rapily alongside consumer sentiment in favour of lower carbon technologies and operating models, a company that communicates its climate resiliency to its investors will have a competitive advantage over those which don't.
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