Coming clean on climate risk

London skyscrapers

Grantham Co-Director, Prof Joanna Haigh, considers the latest recommendations on how businesses can open up to investors about their vulnerability to climate change.

Climate change will affect a wide range of industries, and there is a growing push for companies to publish an assessment of the losses they could suffer as a result. Last month Alyssa discussed the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) (established a year ago), looking at why and how businesses should release details of their climate-related financial risks. Last week, at a smart event in the Tate Modern gallery, I attended the launch of task force’s recommendations report.

Not being well versed in economics or finance I went along fearing I would understand little and appreciate less, but my apprehensions were unfounded: I emerged feeling not only better educated but also more positive than I have for a while on the potential for the world to make the transition to a low carbon future.

Chair of the task force Michael Bloomberg (Mayor of New York City 2001-2013), who opened the event, considers climate change to be not only an environmental problem but a business one as well. In his perspective, business people tend to welcome evidence, not argue with it, and want to act on it in the interests of their investors. Thus knowledge of risks associated with climate change provides the basis for more stable and resilient businesses and economies.

Michael bloomberg speaks to busy room
Michael Bloomberg introducing the TCFD event last week.

I was interested to learn that the number of insurance claims relating to extreme weather events has increased five-fold since the 1980s. Climate change can impact a wide range of industries outside of the insurance sector and Mark Carney, Governor of the Bank of England and Chair of the FSB, described how important it is for them to understand the risks. He also considers that market adjustments to climate risk can help smooth the transition to a low carbon economy through informed investment.

Mainstreaming climate disclosures

The report makes recommendations to businesses about including climate-related disclosures as part of routine financial reporting, a move that would give these considerations a significant profile boost.  The task force took evidence across regions, industries and expertise, including from sectors considered to be most exposed to climate risk (energy, transport, real estate etc.).

The report focuses on four thematic areas that generally reflect on how organisations operate: governance, strategy, risk management and metrics & targets, which are in line with the categories that companies who already report might be familiar with. It considers that its recommendations provide a foundation for immediate action and are flexible enough to evolve as climate-related disclosure practices mature.

A positive outlook

Given that the proposed disclosures are entirely voluntary it remains to be seen how extensively, or quickly, the recommendations will be adopted but many attendees at the event were convinced of the potential advantages.

Mary Schapiro (Chair of US Securities and Exchange Commission 2009-2012) believes that businesses and investors already understand the issues and will act on stakeholder concerns. “Climate disclosure is now irreversible,” she said, speaking at the event. And Michael Bloomberg, reminding us that many cities, local groups and private businesses are already moving towards low carbon options, seems to consider the shenanigans (my word not his) of the US federal government to be almost irrelevant. Perhaps there is some hope after all.

The TCFD report is now out for a 60-day public consultation.

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