Original Document: August 2017 – published in G&A’s “To the Point” Management Briefing Platform
Republished on Sustainability Update – October 2, 2019
by Hank Boerner – Chair and Chief Strategist – G&A Institute
The Work of the TCFD Will Affect Your Company’s Important Financial Disclosure & Filings.
And Your Relationship With Investors, Lenders, Asset Managers, Insurers, Public Sector Entities…
More climate-related disclosure in store for your company’s income statement/cash flow statement/balance sheet.
How will your company be affected by the FSB TFCD guidelines for your company’s ESG disclosure?
The Financial Stability Board (FSB) is a global, multi-stakeholder organization that brings together senior policy makers from the G20** nations plus leaders from the European Union (with 28 individual states), Hong Kong, Singapore, Spain, and Switzerland.
The Board’s gatherings include representatives of the G-20’s central bankers, regulatory leadership, bank and financial sector oversight leaders, and others.
The deliberate and work to create “financial stability” policies for countries to follow — these are not mandates, not replacements for existing sovereign authorities — that those at the table as thought leaders and influencers can also take home and implement in various ways.
There are six regional “consultative groups” that help coordinate activities in an additional 70-plus countries, including in developing economies & emerging markets.
In this way as financial sector policies are being formulated there is help available from more experienced professional (such as professional colleagues in developed nations, the G20 plus four group),
The work of the FSB (formed after the 2008 global financial crisis) is all about addressing risk in the financial services sector – the important tasks of identifying risk, addressing risk, avoiding risk, developing protective risk management approaches for underwriters (insurance companies); lenders (banks); investors (asset managers and asset owners).
And in “risk” for all of these entities and their activities there is the looming question of the possible impacts on all kinds of assets in a rapidly-changing global and in regional climate conditions.
The Finance Ministers and Central Bankers of the nations in the G-20 asked the FSB to address this evolving challenge and to review and make recommendations on how the financial sector can take account of climate-related issues. Think: The Federal Reserve and the Securities & Exchange Commission in the U.S.A. — the Bank of England in the U.K.
And the focus is on “risk” for all these entities and their activities.
Therefore, there is the looming questions about possible impacts of a changing climate on both corporate and fiduciary assets.
The FSB leaders convened a “Task Force on Climate-Related Financial Disclosures — the FSB TCFD*.
The task force is headed by Chair Michael Bloomberg (he’s former mayor of New York City, principal of Bloomberg LP, UN Envoy to Cities, chair of the SASB, etc.). Mr. Bloomberg leads the 32-member task force; the work began in December 2015.
There were numerous invitations to stakeholders to submit suggestions (such as the American Bar Association); public meetings were held; industry input was solicited — and at year-end 2016 the recommendations were being drafted for public release in late-June 2017.
Quick Review
The primary aims of the task force work were:
- To develop climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions;
- This, in turn, would enable stakeholders to understand the carbon-related assets in the financial sector and the financial system’s exposure to climate-related risks.
The recent release of the task force’s draft report is an important heads up to boards and managers in many sectors — the carbon-related risk / the climate change risk is likely to be a very important consideration for the financial sector players going forward, in the ways they do business with your company.
It is important to note that the FSB task force focused on the financial impact of climate change on a corporation, especially in the financial services sector — not the impact of the corporation on the environment.
These are the four top-line thematic areas for corporate disclosure on climate change matters across sectors and industries; these are to be disclosed in either the regular public filings or in supplemental reports on a voluntary basis (so far):
Corporate Governance Factors
The organization’s governance structure around climate change risk and opportunities (in the USA, the SEC has reminded public company boards of directors of their responsibility to oversee this more than six years ago).
Strategies / Strategy Setting
The current and potential impacts of climate risks on the company’s strategies, and, operations, business, and financial planning.
Risk Management
The company should identify, assess and manage climate-change risks and disclose the processes used to do this.
Metrics / Targets To Be Set
Determining the appropriate metrics used and targets set by the organization to assess and manage climate-related risks and opportunities? These should be explained to stakeholders.
Think about the approach of the FSB TCFD guidelines and the impact on your organization in this way:
- There are transition risks for a company which will include: policy, legal; technology; markets; corporate reputation issues.
- Transition opportunities for companies will include: enhancements in resource efficiency; varied energy/sources; innovative products & services; corporate resilience.
- All of the above could and do have an impact on the company’s financials — its revenues and expenditures.
- The impacts should be reflected in key corporate disclosures: the 10K, the proxy statement, the income statements; cash flow statements; balance sheets.
- Which then impacts: corporate assets and liabilities; capital and financing.
- And all of this is the province of the board of directors and the C-Suite of the public company. The responsibility is clearly at the top of the organization in the Task Force work.
Ask yourself as you evaluate these developments: What business is your company in? How resilient to climate-related risk is your company? Are you taking advantage of climate change opportunities?
There is [Task Force] Guidance for Financial and Non-Financial companies in certain sectors.
- For the Financial Sector: Banks: Insurance Companies; Asset Managers; Asset Owners.
- For Non-Financial Industry Categories: [Initially] Energy; Transport; Materials & Buildings; Forest Products. These industries are identified as accounting for the largest proportion of GHG emissions, energy usage, and water usage.
The task force suggests that companies in these sectors with more than US$1 billion in annual revenues should consider disclosing strategy and metrics and targets information in other reports when the information is not considered to be material and therefore included in the required financial filings.
It is expected that the adoption/uptake of the FSB task force recommendations by companies in the financial sector and in targeted industries will evolve over time, as companies disclose important information and [especially] as financial sector firms utilize the information in some way.
The task force adopted a five-year time frame for development of quality and consistency of reporting as suggested by the recommendations.
The ultimate goal: Broad understanding of the concentration of carbon-related assets in the financial system and the financial system’s exposure to climate-related risks (such as in the industries in focus).
The task force will be monitoring implementation of the recommendations beginning later in 2017 and into 2018 and will engage with stakeholders going forward.
Corporate Community Reaction
How did the corporate community react to these recommendations?
The FSB says more 100 companies with combined market caps of US$3.3 trillion and financial community firms with more than $24 trillion in AUM provided statements of support, encouraging the embrace of the TFCD recommendations.
The FSB task force recommendations closely align with other public disclosure standards and frameworks. Adoption would move a company in the direction of an integrated reporting structure.
The SASB recommendations for sustainability disclosure such as in the 10-k is closely aligned with material information (and materiality is addressed by the task force).
It’s important to keep in mind: The GRI Standards, taking effect in January 2018, replaces the current G4 framework for all corporate reporting; the GRI Standards will definitely move companies in the direction of reporting against the FSB TFCD recommendations.
If you have questions about the task force recommendations and the impact on your company, or the opportunities presented for enhanced disclosure for investors and stakeholders, the G&A Institute team is available for a conversation.
We are monitoring the uptake of the important climate change disclosure recommendations by U.S. and global companies going forward.
RESOURCES:
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Notes:
The TCFD:
* The Task Force Vice Chairs include Graeme Pitkethly, CFO Unilever; Denise Pavarina, Managing Officer Banco Bradesco; Christian Thimann, Group Head, Strategy, Sustainability and Public Affairs, AXA; and Yeo Lian Sim, Special Advisor, Singapore Stock Exchange.
Task Force Members include leaders at KPMG; BlackRock; Generation Investment Management; JP MorganChase; UBS Asset Management; Moody’s; Tata Group; Ernst & Young; Barclays; Bank of China; Deloitte; PGGM; Swiss Re; BHP Billiton; HSBC; Storebrand; Aviva Investors; ENI; S&P Global Ratings; Tokio Marine Holdings; Canada Pension Plan Investment Board; Daimler; Air Liquide Group; Dow Chemical; EnBW; PGGM.
Keep in mind these important organizations are members of the Financial Stability Board:
- USA: U.S. Department of the Treasury; US Securities & Exchange Commission; Board of Governors of the Federal Reserve System
- Canada: Bank of Canada; Office of Superintendent of Financial Institutions; Department of Finance
- China: People’s Bank of Chain; China Banking and Insurance Regulatory Commission; Ministry of Finance
- United Kingdom: Bank of England; Financial Conduct Authority; HM Treasury
- Germany: Deutsche Bundesbank; BAFIN; Bundesministerium der Finanzen
The complete list is here: https://www.fsb.org/about/fsb-members/
The G-20
** The Group of Twenty (“G20”) nations comprise an international forum for discussing economic, financial and related issues. The Group of 20 account for more than 80% of the world Gross Domestic Product and almost the same amount of world population.
The first meeting of the Group was in Berlin in late-1999; there have been almost two dozen meetings since then; attendees include heads of state. (The initial participants were finance ministers and central bank leaders — the same players who asked for the Task Force to go to work on expanding corporate disclosure on climate change issues.)
The G-20 nations are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the Republic of South Korea, Mexico, Russia, Saudia Arabia, the Republic of South Africa, Turkey, United Kingdom, United States of America – plus the European Union; plus the European Central Bank; plus The Netherlands and Spain, “non-members” that attends leader summits.
Also participating and invited to conferences: Chair, ASEAN Association of Southeast Asian Nations; African Union; New Partnership for Africa’s Development (NEPAD); World Health Organization (WHO); International Monetary Fund (IMF); United Nations; World Bank; International Labour Organization (ILO); Organization for Economic Cooperation and Development (OECD); World Trade Organization (WTO); Chile, representing the APEC nations; Asian Development Bank (ADB). The invite list can vary.
The G7 is a smaller group: Canada, France, Germany, Italy, Japan, United Kingdom, United States of America.
This was originally the G8; Russia was added (the eighth state) was suspended after the annexation of Crimea in 2014. The G7 governments’ focus is on issues in the more developed industrial economies.
