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TCFD: Better Transparency on Climate Related Risks Benefits to Better Allocation

Created in 2015 by the Financial Stability Council (FSC) at the end of COP21, the Task Force on Climate-related Financial Disclosures (TCFD) is a working group made up of politicians, business leaders and financial companies who recognize the importance of transparency of climate-related risks.

An entity made up of 1,500 supporters, including companies representing a combined market capitalization of $12.6 trillion, and supporting financial firms being responsible for assets of nearly $150 trillion.

The TCFD publishes its 2020 report based on the analysis of 1700 companies, using artificial intelligence. The result shows the progress made, and nevertheless underlines the need to produce more information and transparency on the climate. It also highlights the fact that the most significant increases concern the companies the most exposed to climate risk.

To date, more than 1,500 organizations have expressed their support for the TCFD recommendations, representing an increase of over 85% since the 2019 status report.

However, despite the significant momentum, the 2020 Status Report highlights the continuing need for progress in improving levels of TCFD-aligned disclosures given the urgent demand for consistency and comparability in reporting.

In particular, disclosure of the potential financial impact of climate change on companies’ businesses and strategies remains low.

«The work that governments and businesses are doing to address the devastation caused by the coronavirus is also an opportunity to build a stronger, more resilient, and more sustainable economy – and transparency and disclosure have an important role to play.

The more companies know about their risks and opportunities related to climate change, and the more information investors have, the better we’ll be able to allocate resources and make progress – so it’s encouraging to see leaders in the public and private sector implementing the Task Force recommendations, as outlined in this report. »

Michael R. Bloomberg, Chair of the Task Force and Founder of Bloomberg LP and Bloomberg Philanthropies

Other key findings from the Task Force’s review of company disclosures, insights from users, and other research include:

• Expert users of disclosure identified the impact of climate change on a company’s business and strategy as the “most useful” information for financial decision-making.

• Asset manager and asset owner reporting to their clients and beneficiaries is likely insufficient.

«Investors are increasingly demanding climate-related disclosures from the companies they invest in, and this demand is driving global momentum around the TCFD recommendations across financial and non-financial sectors.»

Mary Schapiro, Head of the TCFD Secretariat and Vice Chair for Global Public Policy at Bloomberg LP

At the last press conference, UNISDIR the General Secretary Mami Mizutori said that The costs of natural disasters have been estimated at nearly $ 3 trillion since 2000, but the actual amount was arguably higher as a large number of countries, especially in Africa and Asia, do not provide information on the economic impact.

Climate change is a major challenge for the finance sector
which plays a decisive role in financing the transition to a
low-carbon economy.

In terms of climate risks, we are thinking in particular of the physicalrisks caused by climate change that can directly impact physical assets, or endanger economic activity (fixed assets, temporary shutdown, and / or permanent shutdown). Risks linked to climatic events such as rising water levels, temperature increases, or more periodic crises, such as storms, floods or droughts.

There are also the risks of transition to a low carbon economy which requires a rapid and sometimes radical evolution of the regulatory framework, the updating of processes, the application of new taxes, or simply a change in behavior and consumer habits. An example of the financial impact of the transition risk is that of stranded assets which in order to limit global warming to less than 2 ° C, must be kept in the ground, quantifying this “sacrifice” according to IRENA at $ 12 trillion.

«The TCFD recommendations support greater consistency in climate-related risk disclosures by companies around the world, which will help to prevent market fragmentation.

The report shows that there has been significant momentum around adoption of and support for the TCFD’s recommendations, while also highlighting and making proposals to address challenges to more consistent and robust implementation. ”

FSB Chair Randal K. Quarles

Faced with climate risks, investors’ objective is part of a long-term strategy to protect – and create – value for their assets. Investor who aligns his portfolio on a “2 ° C trajectory” identifies the companies and the projects in accordance with a decarbonisation strategy.

To support companies’ implementation efforts, the Task Force is issuing two guidance documents with the release of this status report:

• Guidance on conducting climate-related scenario analysis; and

• Guidance on integrating climate-related risks into existing risk management processes and disclosing those processes.

The full 2020 Status Report, guidance documents, and consultation document are available on the TCFD website. The Task Force will deliver its next status report to the FSB in September 2021.

Article: Joana Foglia

Post Author: Wealth Monaco