Part Three of a three-part series. Part One can be found here and Part Two here.

Key policy choices for climate disclosure include the substance, form and location of disclosures. How the firm decides to address these policy choices will influence planning for the activities in Part Two.

Substance

Firms must decide what to disclose — and what not to disclose. The TCFD Final Report (PDF) and Implementation Guidance (PDF) provide detailed disclosure recommendations for all sectors, plus supplemental disclosures for financial institutions (banks, insurers, asset owners and asset managers) and certain nonfinancial sectors (energy, transportation, materials and building, and agriculture, food and forest products). Also, Appendix 4 in the TCFD Technical Supplement on scenario analysis provides examples of corporate disclosures on scenario analysis.

Key policy choices regarding the substance of disclosures include:

• What information is material to investors
• What financial and nonfinancial metrics and targets to report
• How much to disclose in scenario analyses
• What confidential business information and other potentially prejudicial information will not be disclosed
• Consistency of disclosures across media

Of these, scenario analysis disclosure is the most sensitive because it touches on speculative information that firms consider to be confidential for competitive, legal or other reasons. This sensitivity may explain BP CEO Bob Dudley’s assertion (PDF): "They [the FSB, TCFD, Bank of England and others] push for potentially confusing disclosures, raise the specter of a systemic risk to the financial system from stranded assets, and campaign for divestment" and to caution that such disclosures can open companies up to potential litigation: "I know what will happen: we’ll get sued because we’re off the path after a year."

If Dudley and other like-minded CEOs are nonetheless compelled to adopt the TCFD’s recommendations, effective communication of the types and levels of "uncertainty" will be critical to mitigating such concerns.

Form

Firms must decide how to communicate the significant levels of uncertainty inherent in climate-related risks and opportunities — qualitatively and quantitatively.

Climate strategy and disclosure are about the same thing — making better decisions under conditions of uncertainty. Climate strategy reflects management’s best efforts to address uncertainty. Climate disclosure is intended to help investors price uncertainty.

Yet, communicating the current state of a firm’s understanding about the characteristics and implications of climate-related uncertainty and variability to a statistically challenged group of investors, analysts and financial journalists is a formidable challenge. This challenge is comparable to that faced by scientists in communicating humankind’s current understanding of climate change to non-technical policymakers and members of the media and general public.

Firms contemplating scenario-based climate-related financial disclosures can learn much from their efforts (see, for example, "Best Practice Approaches for Characterizing, Communicating, and Incorporating Scientific Uncertainty in Climate Decision Making" [PDF]).

Firms contemplating scenario-based climate-related financial disclosures can learn much from their efforts.

Describing uncertainty in qualitative language, using words such as "likely" or "unlikely" — terms often used in securities and accounting disclosures — is potentially confusing, as such words can mean very different things to different people or different things to the same person in different contexts. When uncertainty is described quantitatively, a variety of analytical tools and models are available to investors to perform analysis and support decision making, which is the TCFD’s goal. The challenge is to communicate uncertainty in a way that is decision-useful and not confusing.

Clear communication about uncertainty in climate-related financial disclosures is essential. Yet, few organizations, other than insurance companies, have experience in communicating the uncertainty of future events or the future effects of prior events to investors in quantitative terms. In addition to scenario based quantitative analysis, "mental model" methods may be useful when — as in the case of financial disclosure — it is possible to study the relative effectiveness of different communication methods and messages.

Location

Firms must decide where to disclose. TCFD recommends publication of climate-related financial information in mainstream financial filings on the grounds that this will foster broader use of such information, promoting an informed understanding of climate-related issues by investors and others, and support shareholder engagement. Alternatively, firms may choose to include TCFD disclosure on their websites or in nonfinancial reports.

Avoid foreseeable pitfalls

• Don’t let the tail wag the dog. Climate-based analysis, planning and strategy development should precede and inform climate disclosure not vice versa.
• Don’t confuse public relations with financial disclosure. Materially misleading climate-related financial disclosures can result in liability for securities and accounting fraud.
• Don’t use a single or just a few scenarios. Scenario analysis is intended to encompass a large number of plausible future climate states and pathways in order to provide a mathematically robust representation of possible — but highly uncertain — future events.
• Don’t let the perfect become the enemy of the good. Start now to integrate climate change into existing systems and processes instead of waiting for the perfect solution.

Failing to plan is planning to fail. Follow this guide to successfully implement the recommendations of the TCFD.

Start now. The stakes are too high to rush the process.