December 20, 2016
Authored by: Kevin Healy
In January 2016, the G20’s Financial Stability Board organized a task force, chaired by Michael Bloomberg, to come up with recommendations for a uniform framework for the disclosure of financial risks and opportunities related to climate change. On December 14, the Task Force released its recommendations, which are intended to assist “all financial and non-financial organizations with public debt or equity” in figuring out what climate-related issues merit disclosure. The report characterizes the “catastrophic economic and social consequences” of unchecked climate change as “[o]ne of the most significant, and perhaps most misunderstood, risks that organizations face today.” It notes that numerous climate-related disclosure frameworks already exist, but so far the information produced under those frameworks has been inconsistent, non-comparable and lacking the context needed for a full understanding of its importance. Because there is no standardized protocol for disclosure, the report indicates that companies face uncertainty as to what information should be disclosed, and how it should be presented to potential investors. The recommendations, along with the extensive “implementation guidance” the Task Force released along with the report, aim to address this problem by providing a framework for disclosure that will assist companies in providing information that is “consistent, comparable, reliable and clear.”
The Task Force begins by noting that climate-related risks fall into two categories: (i) physical risks, such as those posed to coastal storms or droughts that can cause damage or disruption to the company’s facilities, infrastructure or supply chain; and (ii) transition risks, which can result from governmental efforts to reduce greenhouse gas emissions or the shift to a low carbon economy. Transition risks are further defined to include “policy and legal risks” (e.g., those posed by carbon pricing or new regulations mandating a reduction in emissions); “technology risks” (for example, where new energy-efficient technologies disrupt existing technologies –like what LED technology has done to fluorescents); “market risk” (i.e., a shift in supply or demand for products and services); and “reputational risk.”
The Task Force lays out a detailed process for considering and disclosing these risks. That framework is designed around four “thematic areas” reflecting how organizations actually operate. From the top down, the framework addresses “governance,” “strategy,” “risk management” and “metrics.” With respect to “governance,” the report suggests that information be provided as to the nature and degree of board oversight of climate-related issues, and management’s role in addressing those issues. As to “strategy,” it calls for the identification of climate-related impacts (keyed to the categories of physical and transitional impacts discussed above) that could affect the organization and how those impacts have been folded into its strategic and business planning. The report suggests that this discussion be framed around various scenarios, including one where policies are in place to keep the increase in global average temperatures to 2º C, another assuming “business as usual” and others designed around the particular organization’s circumstances. Next, the report calls for a discussion of “risk management” – focusing on the procedures the organization has in place to identify, assess and manage climate-related risk. Finally, the report recommends that the “metrics” used in calculating an organization’s greenhouse gas emissions be defined, so that there is clarity (and comparability) in the disclosures.
Finally, it bears noting that the Task Force articulated “seven principles for effective disclosures.” Those (fairly self-evident) principles suggest that climate-related disclosures should: present relevant information; be specific and complete; be clear, balanced and understandable; be consistent over time; be comparable among companies within a sector, industry or portfolio; be reliable, verifiable and objective; and be provided on a timely basis.
In announcing the Task Force report, the FSB expressed its hope that the disclosure protocol be “adoptable by companies of all types, across sectors and jurisdictions,” utilized for mainstream (regulatory) filings, and useful for all types of investors, lenders and underwriters. Whether the protocol will be the “coin of the realm” or just one more among the many existing protocols turns on FSB’s marketing success over the next few years. Given the care taken in enlisting the requisite expertise and soliciting stakeholder input, it seems to me that the recommendations stand a good chance of gaining wide acceptance, but also will continue to evolve over time.