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Europe Calls for Stronger Climate Risk Disclosure

There’s a worldwide movement afoot and it’s taken another significant step.

The EU Parliament's Committee on Economic and Monetary Affairs (ECON) recently endorsed a proposal that will require financial market participants to disclose sustainability risks and impacts. With mandatory disclosure for all publicly traded businesses, including banks, the parliament’s decision is an important step in making sustainability a mainstream financial concern.

The decision follows the recommendations of a high-level expert group (HLEG) assembled by the European Commission to develop measures to embed sustainability into the EU’s financial system and accelerate the flow of capital to sustainable development.

In its final report published on Jan. 31, the HLEG highlighted the need for a strategic framework for sustainable finance. It identified the following priorities:

  • Establish and maintain an EU “sustainability taxonomy,” starting with climate mitigation, to define areas where investments are needed most;
  • Clarify investor duties to sustainability, and ensure greater focus on environmental, social and governance (ESG) factors within investment decisions;
  • Upgrade disclosures to make sustainability opportunities and risks transparent, beginning with climate change;
  • Enable retail investors to invest in sustainable finance opportunities;
  • Develop and implement official European sustainability standards and labels, starting with green bonds;
  • Establish ‘Sustainable Infrastructure Europe’ to encourage members states to build the infrastructure necessary for a more sustainable economy;
  • And integrate sustainability firmly in the governance of financial institutions, as well as in financial supervision.
From recommendations to action

After the HLEG filed its report, the European Commission developed an Action Plan: Financing Sustainable Growth and released the proposal in April. And it’s this plan that the EU Parliament agreed to adopt in November, placing primary importance on making sustainability factors and disclosure central to investment decisions. 

The ECON committee recognized that to ensure compliance with the Paris Climate Agreement, member states were likely to adopt divergent national measures, which could create obstacles to markets functioning smoothly. In addition, the lack of harmonized rules and indicators relating to transparency would make it difficult for investors to effectively compare the ESG targets, impacts and risks of companies, along with financial products and services.

The commission went as far as to require financial market participants to disclose how sustainability impact is taken into account and how sustainability risks are integrated into investment decisions — information that has to be available on company websites — bringing climate risk to an unprecedented level of visibility.

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How businesses can prepare

There are pragmatic, tangible strategies organizations can deploy, such as scenario modelling, to help evaluate climate-related risks across the value chain.

In particular, the Task Force on Climate-related Financial Disclosures (TCFD) has developed a framework — called out in the European Commission’s action plan — to help companies identify and disclose the risks most material to their business.

TCFD recommendations have already been integrated into the CDP climate questionnaire and companies that disclose to CDP will be expected to respond. 

To move forward efficiently, businesses should consider: 

  • Collecting sustainability and energy data, performing a gap analysis, and developing a process for climate change scenario modeling. CDP and TCFD can provide guidance; the same is true for qualified energy and sustainability consultants.
  • Using a climate model like the one available from TCFD to identify potential business risks and increase transparency. Of note: TCFD recommendations are now incorporated in the credit scores of S&P Global Ratings.
  • Watching changing legislation in global markets. For instance, France’s climate-reporting law (Article 173) requires institutional investors and asset managers to disclose how their business strategies cover climate change.
  • Committing to and implementing a carbon-reduction target through the Science Based Targets Initiative.
  • Disclosing emissions and water consumption data to CDP.

Climate risk awareness is not just a compliance exercise. It is becoming a major competitive advantage. The related threats are real and companies that understand their exposure can make moves to shore up gaps and increase resilience — moves that will pay long-term dividends.

As a result, assessment and disclosure is starting to enter the mainstream. And the EU Parliament’s decision will further accelerate this trend.

Learn how climate-related risk will impact your organization. Specialists from CDP and Schneider Electric shared their expertise on a recent webinar. This deep-dive covered how to identify and mitagate risks through the new TCFD and CDP tools. Watch the replay.

Contributed by Ekaterina Tsvetkova, Head of Sustainability Consulting, Schneider Electric Energy & Sustainability Services