The Task Force on Climate-related Financial Disclosure (TCFD) has set a pathway for climate risk to become an integral part of corporate governance.
The recent global summit of the Task Force on Climate-related Financial Disclosure (TCFD) made it clear that companies will increasingly be subject to challenge on management of climate risk by regulators, investors and wider stakeholders.
The necessity for “climate competence” to be a core skill for corporate boards had already been underlined through the publication of guidance for Effective Climate Governance on Corporate Boards at the World Economic Forum in January.
There was a call for increased quality and quality of TCFD reporting, now standing at 800, in the Task Force’s last Status Report in June.
But as climate protests fill news bulletins around the world, this month’s summit in Tokyo is potentially far more significant, in setting a pathway for climate risk to become integral and unavoidable for mainstream corporate governance in all economic sectors.
A major push
If the original TCFD recommendations were a call to action, the summit charted an action plan through which they will be implemented.
Bank of England Governor Mark Carney used the summit to warn that regulation requiring TCFD reporting is probably two years away, appealing to businesses present to develop their own reporting in the meanwhile, to ensure mandatory measures are shaped to be most effective for business itself.
The veiled threat is that companies who delay on climate disclosure will find themselves subject to costly burden.
Full integration of TCFD recommendations in the EU’s Non-Financial Reporting Directive guidelines is a further sign that Europe may lead mandatory reporting requirements as part of its major push towards sustainable finance, also in the next two years.
Investors are themselves now rewarding and penalising companies on how far they are genuinely integrating climate risk
The UK’s own Green Finance Strategy is hardly less ambitious, setting a target for all listed companies and large asset owners to disclose their climate-related risks and opportunities by 2022 at the latest. And the capital markets regulator in Australia has issued guidance to company directors on addressing climate risk.
But the global summit was notable for its recognition that investors, not simply regulators, are themselves now rewarding and penalising companies on how far they are genuinely integrating climate risk.
One tangible initiative from the summit was new green investment guidance published by Japan’s own TCFD consortium. The effect will be a significant increase in investor engagement with companies on climate issues.
Companies present at the summit reporting anecdotal evidence of increased investor engagement on the issue included Shell, Total and Sumitomo Chemical.
A PwC report cited in Tokyo shows positive correlation between stock or share price and the quantity of TCFD disclosures made by the company, with research from the Commonwealth Climate and Law Initiative quantifying that that the risk of non-disclosure is a bigger liability for the company than of disclosure itself.
Meanwhile, during the 2019 proxy season shareholder activists pressed disclosure resolutions including climate risk at no fewer than 64 company AGMs in the US alone.
An opportunity for leadership
The summit heard TCFD reporting is being adopted by companies valued at a combined market capitalisation of $118trn—an important challenge to organisations that have not yet made the shift.
Already we know that climate-related financial risk should be treated by directors as a core part of their duty to promote the success of the company. Failure to do so could expose directors to legal challenge.
But the action required is now clear. The board should ensure that material climate-related risks and opportunities are not simply reported, but fully integrated in to the company’s strategy, risk-management process and investment decisions.
Climate-related financial risk should be treated by directors as a core part of their duty to promote the success of the company
Among the actions required are ensuring board and committee structures incorporate climate risk and opportunity; recruitment of new directors with the requisite knowledge and skills; incorporating management of climate risk into executive remuneration; and fully integrating it in the company’s own risk management.
Board members must provide the leadership for the company to engage with relevant experts and stakeholders to tackle the challenge, and should ensure they are sufficiently informed themselves to maintain adequate oversight.
Lastly, boards should recognise that climate risk may involve addressing timescales beyond conventional board terms, but are within mainstream investment and planning horizons accorded to every other financial risk and opportunity.
A board responsibility
The summit underlined how existing TCFD reporting is still falling short of being decision-useful, in demonstrating strategic resilience of the company and in incorporating targets for transition to net zero.
It also enabled further discussion of the measurements required for reporting, including clarifying what is green revenue, and the definition of terms such as “environmentally sustainable”.
But as work from the Corporate Reporting Dialogue shows, almost all of the necessary indicators are already available in existing frameworks. It is not whether they are available, but how they are used.
Ultimately this is a responsibility that must reside in the boardroom itself
Plentiful assistance for board members is on hand through online resources like the TCFD Knowledge Hub organised by the Climate Disclosure Standards Board, training offered by organisations such as Competent Boards, or detailed guidance for specific sectors through specific TCFD preparer forums.
But ultimately this is a responsibility that must reside in the boardroom itself. Every company board has its own responsibility to consider where its own business model stands in relation to that transition.
And with finance ministries, central banks and regulators in the top 20 economies of the world concluding that climate change is a risk to the stability of the entire global financial system, no company can ignore this task.
Richard Howitt is a strategic adviser on corporate responsibility and sustainability, and former CEO at the International Integrated Reporting Council.