During the COP21 Paris Climate Change conference the Financial Stability Board (FSB) created the Task Force on Climate-Related Financial Disclosures (TCFD) with recommendations to improve and increase reporting of climate-related financial information. Consistent company reporting will help financial market participants understand their climate-related risks. Access to high quality financial information will allow market participants and policymakers to understand and better manage those risks, which are likely to grow with time.
This is a worldwide initiative for use by companies, banks, and investors in providing information to stakeholders. Their widespread adoption will ensure that the effects of climate change become routinely considered in business and investment decisions.
The TCFD recommendations are structured around four thematic areas: governance, strategy, risk management, and metrics and targets. These areas represent core elements of how organisations operate.
Core Elements of Recommended Climate-Related Financial Disclosures
The TCFD disclosures should encourage more effective thinking and awareness of the impact your organisation has on climate change (Governance) as well as the impact of climate-related risks and opportunities on your organisation (Strategy).
We will need to build on existing processes to identify, assess and manage these climate-related risks and continually review these to adapt for future reporting requirements (Risk Management).
We also need to collate the necessary data required for the metrics and targets to assess and manage relevant climate-related risks and opportunities (Metrics and Targets).
Investors are increasingly interested in the effects of climate change. As asset owners we are aware of the impact we can have through engagement with our Fund Managers and the companies we invest in. We make our voice heard through such engagement and voting power. Reporting on the metrics and targets used to assess and manage relevant climate-related risks and opportunities will strengthen our role as a responsible investor.
To enable better reporting of climate-related risk metrics the TCFD has replaced reporting on GHG emissions with a new recommended measure. Guidance now recommends using a measure called the weighted average carbon intensity (WACI) metric for each fund or investment strategy. The previous calculation for GHG could be skewed by movements in share price. The calculation for WACI is simpler and can apply across asset classes so it is hoped more companies would report on the new measure and longer term help the development of better climate-related risk metrics through ongoing consultation and feedback.
We have had initial discussions as to how we would like to present the Fund’s information under these new reporting recommendations. We are also engaging with our Fund Managers to get relevant TCFD metrics incorporated into the reports they deliver to the Fund. Consistent reporting across the market will help with decisions as information is more comparable and will lead to increased transparency.
To make more informed financial decisions investors, lenders and the Fund as an asset owner need to understand the financial impact of climate-related risks and opportunities. The TCFD identified several categories of climate-related risks and opportunities. These include the potential financial impact to assist investors. Companies should consider what could have a material financial impact in the short, medium or long term in their strategies. The Task Force has provided examples in their framework of possible climate-related risks and their potential financial impact. This should enable organisations to identify what could be specific to them and their industry.
The figure below shows how you can reflect this financial impact in your Income Statement, Cash Flow Statement and Balance Sheet.
Climate-Related Risks, Opportunities, and Financial Impact
The transition to a lower carbon economy requires these risks and opportunities to be reported for transparency to investors. Reporting on metrics and targets over time will also give trend analysis and you can see if targets are being met easily or if an event has the potential to affect a company achieve its strategy.
Reporting of these measures will continue to evolve as more organisations make their contributions and their reports are analysed. The information disclosed will become more consistent and standardised and quality of data should improve too.
The Fund continues to be an active asset owner engaging with our Fund Managers on ESG issues and discussing our requirements for reporting as per the TCFD recommendations.