Market Perspectives: Responsible Investing

The taskforce on climate-related financial disclosures: What does it mean for investors?

Eco power, wind turbines

Key summary:

  • Climate change presents a potential systemic risk to companies in key sectors, and the investors who own them
  • The Taskforce on Climate-related Financial Disclosures (TCFD) sets out a framework and metrics to guide consistent risk reporting
  • Investors will be expected to improve their own disclosure — and to play their part in supporting better reporting by the companies they invest in

What is the Taskforce?

On June 29, a comprehensive new report was issued with the ambition of being the definitive guide to how investors, and the companies they invest in, should analyze and report on the risks and opportunities presented to their future business by climate change.

The group behind the report was the industry-led Taskforce on Climate-related Financial Disclosures. The origins of the Taskforce lie not with ESG or responsible investment, but with central banks. In the aftermath of the financial crisis, regulators have been asking themselves, what might the next systemic risk to the global economy be? Mark Carney, Governor of the Bank of England, believes that climate change might be such a risk, and set up the Taskforce with the goal of providing data to allow corporations, investors and ultimately regulators with the information to see how big this risk may be, and how it can be managed.

The Taskforce was established by the Financial Stability Board, the international grouping of central banks, as an industry-led initiative, with 32 members chaired by Michael Bloomberg. Its final report was issued in June, and includes specific recommendations on what types of disclosures on climate risk should be made by corporations and investors. The Taskforce stresses the need for this disclosure to be high quality — recommending that it appear in mainstream financial reporting.

Why should investors pay attention?

The recommendations have no legal force, which begs the question — should investors care? The answer is yes, for two reasons. First, improving the state of corporation disclosure on climate change is in our own self-interest. If we can encourage companies to tell us more about the risks they face, we can in turn make better-informed investment decisions.

And second, as investors, we ourselves will have the spotlight turned on our own disclosure, with Taskforce findings already being incorporated into best practice standards. Those investors who are signatories to the UN Principles for Responsible Investment will be asked questions — voluntary, for now — based on the Taskforce in the upcoming reporting round: For those that are listed companies, the Carbon Disclosure Project will be incorporating Taskforce recommendations, and the European Commission, as well as some member governments, are looking at regulatory initiatives, drawing from the experience of France, which introduced ‘Article 173’ requiring investor climate disclosure.

What did the Taskforce recommend?

The Taskforce recommendations are structured around four ‘building blocks’ of Governance, Strategy, Risk Management, and Metrics and Targets.

Within each block there is a core set of recommendations, which apply across both financial and non-financial sectors. In addition, an Annex to the main report sets out specific recommendations tailored to particular sectors.

For more details on what the taskforce means for investors, download the full PDF here. 

Download PDF

 

Vicki Bakhski
Director
Governance and Sustainable Investment

Matthias Beer
Associate Director
Governance and Sustainable Investment

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