Voluntary climate risk disclosures are lagging — is it time for regulators to step in?
It’s been a year since the Task Force on Climate-related Financial Disclosures (TCFD) released its recommendations. Backed by the G20 finance ministers and Michael Bloomberg, recently reappointed as the United Nations special envoy for climate action, the TCFD offered concrete guidance for public companies on how to report risks and opportunities arising from climate change.
The TCFD left no doubt that boards have an obligation to disclose material climate risks through standard regulatory filings. While that might seem obvious, it was important for the TCFD to remind boards of this fact. Markets only work if investors, lenders and insurers have complete and relevant information for making decisions.
But are investors any closer today to getting material, decision-useful information from companies about their climate risks?
Looking back, it’s been a year of mixed results. While the financial risks of climate change have been more widely acknowledged, there has been little change in the disclosures in company reports.
On the positive side, a growing roster of institutions support the TCFD recommendations and are working to implement them.
At the end of 2017, more than 240 companies, with a combined market capitalization of more than $6.3 trillion, publicly had expressed support for the TCFD recommendations. In addition, Climate Action 100+, a global investor initiative focused on 161 large greenhouse-gas emitters, last week said its program includes 289 investors from 29 countries, with a total of more than $30 trillion in assets under management.
Global banks are joining in, too. In April, 16 large banking groups released a methodology they developed under the U.N. Environment Finance Initiative (UNEP FI) that will help financial institutions be more transparent about their exposure to climate risks and opportunities.
Also a positive: Many investors have taken a strong public stance in favor of greater disclosure. BlackRock, one of the world’s largest asset managers, sent letters to 120 companies urging them to disclose material financial risks related to climate change, and climate-risk disclosure was one of BlackRock’s engagement priorities in 2018.
Investors made their voices heard during proxy season, too. In 2018, shareholder proposals to compel companies to report on how they are preparing for a 2 degrees Celsius limit on global warming under the Paris Climate Accord won majority support at Kinder Morgan and Anadarko Petroleum, after similar proposals prevailed last year at Exxon and Occidental. More significant, 17 companies in the energy sector agreed to report on climate risk in return for the withdrawal of shareholder resolutions, according to data compiled by Ceres.
The past year also saw greater clarity about reporting standards for climate risks. The Sustainability Accounting Standards Board and the Climate Disclosure Standards Board released a technical paper describing how they are aligning with the TCFD’s methodologies — a step that will help companies implement the TCFD recommendations.
Greater coordination among the various standards-setting, research and reporting bodies would be welcome news to many companies that must contend with a dizzying array of information requests from an alphabet soup of climate and sustainability organizations.
But for all this progress, disclosures about climate risk in corporate filings barely changed from past years. Climate risk continued to be described in vague, boilerplate language and mainly regarded as a regulatory risk.
Companies ignored even the relatively simple TCFD recommendation around governance, which said a company should discuss the board’s oversight of climate-related risks and opportunities. That’s a pretty low bar. A governance discussion doesn’t require fancy math or scenario modeling.
What’s more, the broad discussion about climate risk has focused on the wrong companies. Big oil and gas producers are almost always the ones in the crosshairs, but climate change is affecting companies in nearly every industry.
Coastal flooding is a risk for REIT investors, and drought is a risk for shareholders in food producers, but the annual reports for these companies barely give more than a passing mention to climate risk.
The focus on large companies also skews the discussion because their threshold for materiality is high. Risks to supply chains, operations or customer demand posed by climate change might simply be too small to disclose for a company with billions of dollars in annual revenue. But the point of the TCFD report is to get companies of every size and in every sector to address these issues.
What might prompt companies to move faster on climate disclosure? Keep your eye on regulators, investors with a more activist bent and litigators.
So far securities regulators have shown little appetite for making climate disclosure mandatory, although that could change. In the United Kingdom, a legislative report issued last month recommended mandatory public reporting of climate change exposures by large companies and asset managers, particularly pension funds, by 2022. At the same time, TCI Fund Management, a prominent activist investor, urged the Bank of England to require banks to compel corporate borrowers to disclose their exposures to climate change.
The prospect of stronger regulation in Europe helps explain why companies there are farther along in climate disclosure. An analysis by the Carbon Disclosure Standards Board found that companies in France, the U.K. and Germany are the most prepared to disclose risks in accordance with TCFD guidelines.
Litigation also could accelerate the pace of climate disclosure. Last year, Australia’s Commonwealth Bank was sued by investors who claimed the bank failed to disclose the risks to its business posed by climate change. The suit was settled late last year, but it probably won’t be the last of its kind.
Investors are demanding more disclosure about climate risks, and companies are getting the message, but there’s still a long way to go before material climate risks are a standard part of company financial reports.