Calculating the Price of a Warmer Planet

Are you ready for climate risk management?

While many companies are integrating sustainability initiatives into their business strategy, calculating the potential financial impact of climate change is done by few and often by applying different methodologies. Given that businesses are (rightly) profit-motivated, many experts hope that consistent financial risk disclosures associated with climate change will drive real change.

Following COP21, the G20 Finance Ministers and Central Bank Governors asked the Financial Stability Board (FSB), whose role is to promote global financial stability, to analyze how the financial sector could consider climate-related issues. The FSB asked the Task Force on Climate-Related Financial Disclosure (TCFD), a private sector expert group led by Michael Bloomberg, to investigate and propose reporting guidelines. 

The final conclusions were published in June 2017 and presented at the G20 Summit in Hamburg, Germany, in July. The report noted that “The expected transition to a lower-carbon economy is estimated to require around $1 trillion of investments a year for the foreseeable future.”

Most importantly, TCFD developed a set of voluntary disclosure recommendations for companies looking to provide climate risk information to investors, lenders, and insurance underwriters. The Task Force focused on financial impact and organizational opportunities rather than the impact of an organization on the environment.

A new framework for disclosure

The Task Force presented 11 disclosure recommendations on four topics: governance, strategy, risk management, and metrics and targets. It presented a structured approach for businesses to integrate climate-related risks and opportunities in their processes. This allows companies to not only demonstrate their readiness for long-term changes, but also to be effectively prepared and resilient to climate change.

One hundred CEOs, including Jean-Pascal Tricoire from Schneider Electric, signed a statement of support for these recommendations and a number of organizations have already integrated TCFD’s guidance in their practices. In addition, CDP will include the recommendations in its new reporting framework, the Climate Disclosure Standard Board has adapted its reporting framework accordingly, and another ten companies have committed to implement the Task Force proposal within three years.

The business risk of climate change

Most of the disclosure recommendations were already part of CDP’s Climate Change reporting framework. However, there are significant new inputs to the 2018 questionnaires as a result of the guidance. More details on risks and opportunities identification, financial impact evaluation, and business integration will be required as a result.

One notable suggestion is that companies consider how they will fare under different climate scenarios, using climate-related scenario analysis. Uncertainty is a crucial component of climate change, hence the concept of scenarios. Climate-related scenario analysis aims to better define a business’ resilience to future states, for example, under the IPCC’s 2 degrees scenario.

The BHP Billiton’s Climate Change: Portfolio Analysis Views after Paris also presents an approach to portfolio evaluation and climate change scenario planning and contains trends in commodity prices, potential global responses to climate change, regulatory developments, and the potential effect of possible future events.

The business benefits of climate risk disclosure 

TCFD outlines several benefits to companies that implement its recommendations:

• Easier access to capital by increasing investors’ confidence
• A streamlined approach to meeting existing disclosure requirements
• Increased understanding of climate-related risks and opportunities
• Proactively addressing investors’ demand for climate-related information

How to get started

The Task Force stated that reporting climate-related risks and opportunities will evolve as organizations, investors, and others contribute to the quality and consistency of the information disclosed. So companies must understand the recommendations as early as possible, identify gaps and build a response strategy.

1. Review current governance processes to understand climate-related risks and opportunities
2. Assess climate-related data quality and integrate it into financial reporting assurance processes
3. Use scenario analysis, and evaluate portfolios and disclosure practices using these scenarios.
4. Integrate climate factors in risk-management strategies and develop tools for continuous assessment
5. Commit to implementing the recommendations of the Task Force

TCFD’s requests should lead to more consistent, comparable, and reliable disclosure of corporate climate-related information.