Climate change enters the boardroom: The business implications of the G20 Task Force report

Last week, however, saw the release of the final report from the Carney/Bloomberg Task Force on Climate-Related Financial Disclosures (TCFD). It is set to bring climate change squarely into the boardroom.

The Task Force provides a clear recommendation for businesses to include information on the climate-related material risks they face in mainstream financial reporting. The report illustrates why all companies should be examining the governance, strategy, risk management and metrics of climate change. It creates the infrastructure for flexible and immediate adoption of climate action plans – across all industries and sectors.

Climate strategy: The practicalities

There are four essential components of the TCFD recommendations for companies to consider:

– Governance: climate related risks and opportunities, board and senior management engagement in climate issues.
– Strategy: actual and potential impacts of climate-related risks and opportunities to the organisation’s business model.
– Risk Management: the processes used to identify, assess and manage climate-related risks.
– Metrics and Targets: the tools to measure, asses and manage relevant climate-related risks and opportunities.

One of the most significant points is that scenario analysis is a key component of the corporate climate strategy that investors now expect to see from leading companies.

These analyse the potential business impact of different scenarios, including complying with the Paris target of limiting global temperature rise to 2°C or below. Scenario analyses also shed light on the resilience of the organisation’s strategy to, for example, new climate regulations or supply chain risks associated with rising temperatures. Such reporting will bring ‘future’ climate risks into the present, and will support greater understanding of the financial sectors’ exposure to climate-related risks through their portfolio companies. 

It also provides investors with comparable information to identify winners in the low-carbon economy, and helps ensure all stakeholders that companies are analysing and disclosing climate risk information with the same rigor as they do financial information.

Climate is everybody’s business

Investor and business momentum behind global climate action is irreversible. At recent shareholder meetings in the US, investors at ExxonMobil, Occidental Petroleum and the utility PPL demanded that the companies report on the long-term business impacts of climate change. In the UK, the Bank of England recently announced it will examine banks’ exposure to climate change, as a part of efforts to tackle the significant financial threats posed by rising temperatures. This will undoubtedly have trickle down effects, as banks are forced to consider their lending practices to the most emission-intensive industries.

Similarly, nearly 6,000 companies disclosed environmental data through CDP last year, close to 60% of the market capitalization of the world’s largest stock exchanges. This year over 800 investors representing US$100 trillion in assets are expecting and demanding that even more companies do so. Managing climate risk is simply good business: Companies on CDP’s ‘Climate A List’ have outperformed the market by 6% over four years.

The direction of travel is clearly towards greater transparency and a low-emissions economy, as both investors and governments recognise the material risks posed by accelerating climate change and expect companies to have explicit sustainability strategies in place. The Task Force’s recommendations will bring climate change further into the Board room, as every Board is required to consider and sign off on their mainstream filings. As such, companies must take steps to ensure that key decision-makers are sufficiently informed on climate-related topics to build a sustainable business, fit for a below 2°C market.