A new capital markets solution is opening up in the battle against climate change—and business is leading the charge.
Under the leadership of former New York City Mayor Michael Bloomberg, a global industry initiative just released its much-anticipated guidelines for voluntary climate risk disclosure by companies and investors in financial filings.
The guidelines, released Wednesday, of the Task Force on Climate-related Financial Disclosures, are a big deal because they were developed by business for business. The task force was created by the G20 with one specific goal: to cut through the confusion in the market around financial reporting on climate risk by providing a single set of concrete, workable guidelines for all industries.
The TCFD’s guidelines will help standardize how climate risks and opportunities are analyzed by companies, and generate critical information for investors to help them make better decisions. They are a powerful statement by some of the world’s largest corporations that climate change is a systemic material risk that requires clear and efficient disclosures.
With these proposals, business leaders from across our economy are saying that all parts of the capital markets need to be engaged on climate change and that the way to do that is through uniform analysis and disclosures by investors and companies alike.
We support the TCFD’s efforts because they include a level of corporate involvement and support from G20 nations that we haven’t seen before. We have worked for decades to advance corporate disclosure of climate change risks on behalf of investors, and the lessons we have learned have been incorporated into the task force’s work.
In fact, I met with task force members in London in February to outline the work we have done with investors and companies to make corporate disclosure a mainstream practice. The TCFD ended up incorporating the pioneering work we have done in corporate sustainability reporting with the Global Reporting Initiative and the U.S. Securities and Exchange Commission.
The TCFD’s robust guidelines—developed by major investors and companies, including Blackrock, Unilever, and Axa—have 11 specific recommendations for all industries, divided into four topics: governance, strategy, risk management, and metrics and targets. They include:
- All companies should benchmark strategic and financial planning using a two-degrees Celsius economic scenario as their baseline for analyzing climate risks and opportunities. This recommendation is based on the Paris Climate Agreement’s goal of limiting global warming to two-degrees Celsius, It is a critical piece in the puzzle of understanding the real impacts of global warming on business and investments, which we strongly advocated for with our investor partners worldwide.
- All companies should disclose information related to water, energy usage and efficiency, land use, and revenues from products and services designed for a low carbon economy.
- All asset owners and asset managers should assess and disclose the climate risks in their portfolios, which is the first-ever global recommendation for investors.
Healthy markets and strong economies are built on transparency. By having more consistent, more comparable disclosure about the risks and opportunities of climate change, investors, banks, and insurers can make better, more informed decisions about where to put their money.
Disclosure is now more critical than ever. No matter the political winds in Washington, climate change is real and its impacts are being felt across our global economy. Climate risks affect 72 out of 79 industries or 93 percent of the capital markets worth $27.5 trillion, according to a recent report by the Sustainability Accounting Standards Board.
While the TCFD’s initiative promotes voluntary disclosure, we believe its guidelines can be part of the groundwork for the mandatory disclosure that regulators need to move towards. Mandatory disclosure is the only way to ensure that reporting is truly comparable and consistent.
For instance, it provides a basis that financial regulators or stock exchanges in any country can use as it considers providing guidance or rules on climate risk disclosure. The SEC’s 2010 guidance on climate risk disclosure still provides a strong model for guidance by other securities regulators, and the TCFD recommendations add useful information that investors have asked companies for—like two degrees scenario planning—that’s fully aligned with disclosure rules in the U.S. and abroad.
The demand for more information is clear. That’s why 45 institutional investors representing $1.1 trillion in assets under management called for stronger climate risk disclosure in response to the SEC’s request for public comments on a wide range of disclosure topics. And more than 140 legislators from more than 30 countries called on the world’s stock exchanges to take note of the TCFD recommendations and update their climate disclosure practices.
It is only by measuring these risks that our markets and economies can manage them. The TCFD guidelines are a profoundly important step forward in that direction.