The signing of the Paris Agreement in December 2015 and the speed at which it was ratified signals a step change in the way governments are addressing climate change. As national policies are put in place to accelerate the transition to a low carbon economy, companies and their leaders will find themselves at the heart of this change. Physical climate risks as well as the risks arising from the low carbon transition (e.g. climate policy risks) are emerging risks that businesses should review.
To address this issue, Mark Carney launched the Financial Stability Board's Task Force on Climate-related Financial Disclosure (TCFD).In June 2017, the Task Force published its final report containing recommendations on how companies should publicly disclose climate-related financial risks and opportunities to the market and regulators in their financial filings.
All companies with listed equity/debt within the G20 are included within the scope of the report, including asset owners (such as pension plans) and asset managers. We have produced a short summary of the final TCFD Report for business leaders.
In our view, the call for disclosure on how businesses are likely to be impacted and how they plan to respond strategically and tactically will only increase in the coming months. Climate change is an emerging risk that has short, medium and long term implications for businesses and needs to be on the radar of forward-thinking business leaders.
The role of financial institutions in responding to climate change risk.
In order to formulate your approach to responding to the TCFD recommendations, a practical first step is to understand how your existing public disclosures align with the TCFD recommendations and where priority areas to address might lie.
To help companies do this, we have developed a proprietary TCFD Readiness Assessment Tool to assess and score the maturity of a company’s existing disclosures and practices relating to management of climate-related issues.
The tool contains a series of questions addressing each TCFD recommendation and recommended guidance. The questionnaire is completed based on a review of a company’s public disclosures. This could also be supplemented with a review of your peers’ public disclosures and a more in-depth look at your internal business practices.
This will provide you with:
Do you have the right data at the asset, client and portfolio levels to assess for climate risks? Can you quantify these risks, and understand where you are most at risk?
How do you know if an asset we are considering financing is exposed to climate risk, and if so, over what timeframe? Have you got the right processes in place to manage this risk?
How aligned is your portfolio to a low carbon economy transition and have you struck the right strategic balance between low and high carbon assets to ensure continued profitability?
Have you got the right governance structures in place to identify, assess, manage and monitor climate risks - Do your audit and risk committees have sufficient oversight and insight? Is your CRO aware of this emerging risk?
Are you in a position to meet the current and emerging disclosure expectations of your key stakeholders, including your investors, customers, employees and regulators?
Knowing where your business is exposed to climate risks by sector, geography, and product, and how relatively risky that exposure is.
Understanding the implications for the credit quality and risk-return profiles of your lending and investment portfolios and transactions, including how to incorporate climate risk in existing risk modelling.
Access to a range of risk management tools and support for integrating them into wider credit, investment, operational, market and reputational risk processes.
Access to improved data with enhanced analytics that provide insight at the transaction, client, portfolio, and institutional levels.
Interpreting what the low carbon transition means for your institution, inform strategic decision making and capitalise on the opportunities.
Ready to respond to growing expectations on climate risk disclosure from regulators, investors, clients, debt and equity analysts, and other stakeholders.