Thursday, September 27, 2018

More companies disclose climate change risks, but leave out financial impact, FSB task force finds

By John Filar Atwood

In a survey of 1,700 companies around the world, the Financial Stability Board’s task force on climate-related financial disclosures found that the majority of companies provide some recommended disclosure on climate change, but very few report the financial impact of climate change on the company. The survey also found that only a minority of the surveyed companies disclose forward-looking climate targets, or the resilience of their strategies under climate-related frameworks such as the 2 degree Celsius or lower scenario, which is a key area of focus for the task force.

In 2017 the task force issued recommendations that provided a framework for companies to develop more effective climate-related financial disclosures. The task force emphasized the importance of transparency in pricing risk, including risk related to climate change, to support informed capital-allocation decisions. It acknowledged the challenges associated with measuring and disclosing information on climate change-related risks, but expressed its view that moving climate-related issues into annual financial filings would allow practices to evolve more rapidly.

The newly issued status report measures companies’ progress on the 2017 recommendations. The task force found that a majority of companies surveyed provided disclosures that aligned with one or more of its recommendations. The task force believes that the results demonstrate that it is both possible and practicable for companies to disclose certain baseline climate-related information.

Findings. The task force found that while many companies describe climate-related risks and opportunities, few disclose the financial impact of climate change on the company. In addition, the survey indicated that climate change disclosures vary across industries and regions.

A higher percentage of non-financial companies reported information on their climate-related metrics and targets compared to financial companies. However, financial companies were more likely to disclose how they had embedded climate risk into overall risk management. Geographically, more companies in Europe disclosed information aligned with the recommendations than companies in other regions.

The survey results also indicate that climate-related financial disclosures are still in the early stages. The task force noted that implementation of its recommendations is an ongoing process, and that companies are in different places in terms of their exposure to climate-related risks and opportunities and their reporting capabilities.

The task force hopes that more companies will use its recommendations as a framework for reporting on climate-related risks during the next reporting cycle. It suggested that companies in the early stages of evaluating the impact of climate change on their businesses and strategies and those that have determined climate-related issues are not material should disclose information on their governance and risk management practices.

Better disclosure needed. The task force said that it was encouraged by some of the results of its disclosure review, but believes that companies need to provide more decision-useful climate-related information. In its view, improved practices and techniques would further improve the quality of climate-related financial disclosures and support more appropriate pricing of risks and allocation of capital in the global economy.

The task force intends to publish another status report in June 2019, which will allow for analysis of disclosures made in companies’ 2018 financial reports.