Article
BAMOS 2021 / 2022
Summer 11
Management , and Metrics and Targets . The Governance theme overall remains the least disclosed TCFD recommendation , though this should be the most straightforward .
Diving a little deeper , companies struggle the most with the ‘ Resilience of Strategy ’ disclosure , based on stress testing via climate-related scenarios . This comes as no surprise given the vast guidance ( from regulators , the TCFD and elsewhere ) on scenario analysis methodologies and metrics , and that a scenario analysis often requires specialised external expertise . Added to that is the capacity and willingness for a company to integrate the often disconcerting scenario analysis findings .
Naturally , not all sectors disclose in the same way and their strengths lie in certain TCFD themes . Whilst the Energy sector has traditionally led on TCFD disclosures due primarily to investor pressures , the Building & Materials sector now takes the lead , particularly in GHG emissions under Metrics and Targets . The Insurance sector is leading on Risk Management disclosures , given its strong interest in identifying direct climate-related impacts such as frequency of flooding , noting that
almost 40 percent of the world ’ s population are exposed to coastal climate extremes .
Who is driving the disclosure of climate risks and opportunities ?
Investors .
To date , the largest pressure to publicly disclose climate risks and opportunities , including company net zero commitments , has been by investors . The September 2021
updated Global Investor Statement to Governments on the Climate Crisis , signed by 587 investors representing $ US46 trillion in assets , calls for firm policy and decarbonisation commitments , and mandatory climate risk disclosures . On Day 3 of CoP26 ,
banks , insurers and investors pledged to align
$ 130 trillion ( 40 percent of the world ’ s assets ) towards meeting the 1.50C global warming limit from the
Paris Agreement at CoP21 .
Regulators and domestic efforts to introduce mandatory disclosures also fuels ongoing investor interest in climate disclosures . Financial regulators ( e . g .
APRA ,
Bank of England ,
Banque de France ,
HKMA ) have released pilot studies and guidance around credit stress testing under a changing climate that align with the TCFD , with varying scenario analysis and balance sheet approaches recommended .
April 2022 , which is an improvement from the
‘ comply or explain ’ proposed approach published in early 2020 by the UK Financial Conduct Authority ( FCA ) where companies could still choose not to disclose .
Mandatory disclosure is approaching
There are a few key emerging trends around climate reporting to come in 2022 that will accelerate climate change action , reporting and emission declines .
Mandatory disclosing is certainly on the horizon as countries and investors strive for consistent and comprehensive reporting , including financial impacts – answering the ultimate question of " how material are climate risks and opportunities for my organisation ?". But what will these disclosures look like ? How comprehensive and comparable will they be ? Will there be support around pathways for implementation of climaterelated risks and opportunities ? And will the disclosures be audited ?
Whilst climate scenario analysis remains a challenging endeavour on operations and personnel , those who have undertaken this step are likely to expand the assessment across the value chain , also aligning with quantifying scope 3 emissions . Quantifying region-specific physical climate risks remains a challenge and plays second fiddle to transition risks disclosures , despite the strong interplay between the two .
Finally , any action on climate and net zero targets requires a similar action towards nature positive activities . The introduction of the Taskforce on Nature-related Financial Disclosures (
TNFD ) and ongoing sustainability reports presents a new challenge to develop consolidated ESG strategy and business integrated reporting and resilience . A welcomed acceleration of this goal is the introduction of the
International Sustainability Standards Board ( ISSB ) to develop global sustainability reporting standards , partially built upon the TCFD framework , and supported by
36 countries at CoP26 .
Continued investment needed
What is clear is that the need for quality climate disclosures is growing alongside the demand by investors and stakeholders for consistent and insightful disclosure . Companies in all sectors need to continue investing in understanding the financial and strategic implications of climate change on their business now and into the future .