Climate related financial disclosures

In our recent climate change liability risk report 'the coming wave of litigation' we explore the legal and liability risks that climate change creates for businesses, directors and officers.

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In this section we focus on the growing need for decision-useful and standardised corporate disclosures as a result of climate change. The preeminent metric is that articulated by the Task Force on Climate-related Financial Disclosures ('TCFD'). In June 2017, the Task Force released its list of recommendations for climate-related financial risk disclosures in mainstream corporate filings, covering:

1. Governance
2. Strategy
3. Risk management
4. Metrics and targets

In addition to its general recommendations, TCFD also issued sector-specific guidance for companies in the financial (banks, insurance companies, asset owners and asset managers) and non-financial sectors (energy, transportation, materials and buildings, agriculture, food and forest products) it considers most likely to be affected by climate change and the transition to a lower-carbon economy.

Although many companies support the recommendations, there is an implementation gap. And compliance with TCFD remains voluntary, not mandatory. One of the challenges for companies has been understanding how to integrate the TCFD recommendations into their mainstream reports and conduct climate-related scenario analysis, relevant to their business.

Towards regulation?

In the past year, there has been a marked increase in the pace of financial regulators' consultations on climate risk.

France - There is already a legal requirement for institutional investors to disclose physical and transition climate risk in their portfolios.

UK - the Bank of England has been unequivocal in its warnings on the risks of climate change to the financial system, focusing first on insurers and then on the banking sector.

Australia - the Australian Prudential Regulation Authority (APRA) has acknowledged that the financial risks posed by climate change are: 'foreseeable, material and actionable now'.

Canada - In 2018 the Canadian Government commissioned an expert Panel on Sustainable Finance to consult stakeholders on sustainable finance and climate-related risk disclosures.

Europe - at the wider European level, the wider sustainability of the financial system is under review with the European Commission rolling out its Action Plan for Financial Sustainable Growth, which has as one its three objectives to "manage financial risks stemming from climate change, environmental degradation and social issues".

Future Harmonisation- A Direction of Travel

There is a direction of travel and it is likely that the TCFD-style reporting will eventually become mandatory in jurisdictions, at least in certain sectors.

Many investors, insurers and other stakeholders have indicated their support for mandatory reporting requirements. Certain voluntary disclosure regimes are moving towards mandatory reporting through participating members' agreement.

The UN Principles for Responsible Investment has also introduced a delisting model designed to provide a sanction for its member investors who fail to take their commitment to the principle seriously enough and a number have been placed on the watch-list.

Central banks' and Supervisors' Network for Greening the Financial System (NGFS)

34 central banks and supervisors from five continents, representing half of the world's GHG emissions and 2/3 of global systematically important banks and insurers joined forces in 2017 as the NGFS.

NGFS members include the central banks of Spain, Mexico, Finland, the Netherlands, Denmark, Dubai, Norway, China, Austria, Singapore, Australia and Switzerland.

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