Task Force on Climate-Related Financial Disclosures - A step on the road to mobilising climate finance
The Task Force on Climate-related Financial Disclosures is not going to win a prize for the snappiest title any time soon. It is nevertheless an important step on the road towards the mobilisation of finance in support of the objectives of addressing climate change and moving towards a “net zero emissions” future through a fundamental energy transition.
Origins
In 2015, an international body called the Financial Stability Board (FSB), then chaired by Mark Carney, decided that companies’ exposure to climate change and climate risk was something that could risk their very existence, and needed proper information to support investments.
For example, if countries actually do what they say they will do on meeting the goals of the Paris Agreement on Climate Change, hundreds of billions of dollars worth of assets, such as oil and gas reserves, may become unusable and “stranded assets”. Banks, pension funds and asset managers with investments in such companies need to be looking ahead to identify such risks. At the same time, firms and businesses need to reflect realistic information about the extent to which they are exposed to risks from climate change. How to construct the framework in which to do that?
TCFD
The FSB put together the Task Force on Climate-related Financial Disclosures (TCFD), a global private sector group of leading experts, led by Michael Bloomberg, and the TCFD delivered its Final Recommendations in 2017.
The TCFD recommended that firms should provide accurate and full information on climate impacts and risks in the following four areas:
“GOVERNANCE
Disclose the organisation’s governance around climate-related risks and opportunities
STRATEGY
Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s business strategy and financial planning where such information is material.
RISK MANAGEMENT
Disclose how the organisation identifies, assesses and manages climate-related risks
METRICS AND TARGETS
Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.”
How does this work and why does it matter?
Many governments and financial regulators are now adopting the TCFD as a useful framework for their own expectations. For example, the UK government is a strong supporter of the TCFD approach. It is introducing legislation to say that managers of large pension funds must start applying it. This will be followed by further legislation to apply TCFD principles to all listed companies in the next couple of years.
Meanwhile Mark Carney, the original promoter of the TCFD approach, and a former Governor of the Bank of England, is well placed to take forward and promote the ideas behind it. He has been appointed as the U.K. Prime Minister’s finance adviser for COP26 in Glasgow, and as U.N. Special Envoy for Climate Action and Finance. Finance is one of the U.K. Chair’s five priority areas for negotiation progress at the COP 26.
On its own, a set of reporting and disclosure obligations such as those in the TCFD might just result in another “tick box exercise”. At least all major companies would have to have senior managers go through the exercise of assessing climate risks and opportunities impacting on their businesses, but would it amount to more than that?
Mark Carney has expressed it differently. He has argued that companies and firms which ignore climate risks will cease to exist. By contrast, achieving net-zero emissions will require a transition of the whole economy. Every bank, every insurer and investor will have to adjust their business models. As he puts it:
“This could turn an existential risk into the greatest commercial opportunity of our time”.
Mark Carney’s challenge, and the challenge of the TCFD, could be summarised in his question –
“A question for every company, every financial institution, every asset manager, pension fund or insurer – what’s your plan?”
Reasons for being cheerful
As they consider that question, the signs are that the whole of the financial industry is responding to the climate challenge. The parallel challenges of the direct effects of climate change itself, the need for a Green Recovery from the devastation caused by COVID-19, and the need for colossal investment to support the energy transition and the Race to Zero emissions are not going unanswered.
Here are some examples which give some considerable hope that fundamental change is under way, and that Article 9 of the Paris Agreement on Financial Support can be made to work -
Investor Agenda, representing 1200 international investment companies managing $35 trillion of assets, is calling for a sustainable recovery from Covid-19, and for recovery funding to heed the climate crisis and for business to stand by their commitments under the Paris Agreement.
50 CEOs from banking and insurance, including the largest French and Spanish banks and investment funds from 10 countries have joined the “Green Recovery Alliance” launched by Pascal Canfin MEP and others in the European Parliament in April 2020.
Science Based Targets Initiative and its Business Ambition for 1.5 degrees campaign – 155 companies with combined market capitalisation of over US$2.4 trillion and with 5 million employees - have signed a statement urging governments around the world to align their COVID-19 economic aid and recovery efforts with the latest climate science.
Prince of Wales’ Corporate Leaders Group has 200 businesses which called for a Green Recovery on 1 June 2020 in a letter to the U.K. Prime Minister, including companies such as Sky, Lloyds Bank, Mitsubishi, Anglian Water.
Principles of Responsible Investing claims membership of 2,900 organisations around the world, with a significant component of climate-related investing.
The Task Force on Climate-related Financial Disclosures itself lists 1,440 companies as supporters representing a market capitalisation of over $12.6 trillion.
The UNFCC “Race to Zero” campaign, Championed by Nigel Topping and Gonzalo Muñoz Abogabir now has pledges from 1,101 businesses, 452 cities, 45 investors, 22 regions, 549 universities, and now claims that together these represent 25% of global CO2 emissions and over 50% of global GDP.
It really feels as though finance has achieved its own tipping point, and moves towards a net zero emissions economy are now under way.